2016 (7) TMI 953 - AT - Income Tax

TDS u/s 195 - Payment of Euro towards purchase of Basic Engineering Design Package - withholding tax as being a payment for technical services - Held that - The position of law as it stood then, including the taxing of the income under section 9(1)(vii) was that, if the services which are source of income is sought to be taxed, have to be rendered in India as well has to be utilized in India so as to be held to be taxable in India. Both the conditions have to be satisfied simultaneously, that is, the services which are source of income should be utilized in India and services should have been rendered in India. However, if the second limb is not satisfied that is, services have been rendered outside India, then same was held to be outside the purview of taxability in India. The Ld. CIT(A) has also admitted to this position, however, he held that the Explanation to section 9(1)(vii) inserted by the Finance Act, 2010 with retrospective effect from 01.06.1976 was brought specifically to overcome the said decisions of Hon ble Supreme Court as well as the other Courts. Once this is an admitted position, then it is very difficult to comprehend that, assessee should have deducted TDS on such payment when law of the land did not permit so or envisage any withholding of tax, on the basis of law which was brought from subsequent date albeit with retrospective date stating that, now all such payment for services even rendered outside India is taxable in India. Here, the maxim of lex non cogit ad impossibilia, is fully applicable that is, the law does not possibly compel a person to do something which is impossible, that is, when there was no provision for taxing an amount in India at the relevant time then how it can be expected that a tax should be deducted on such a payment. Here in this case, the decision of Hon ble Supreme Court in the case of Ishikawajma Harima Heavy Industries Ltd vs. DIT (2007 (1) TMI 91 - SUPREME COURT ) was rendered on 4th January, 2007; agreement was entered by the assessee with SP Italy on 26th April; 2007; application was made before the AO on 23rd August, 2007 for the payment to be made in September, 2007; therefore, assessee had a valid reason and reasonable ground for not with holding the tax at that time, because as observed above, there was no such provision or any explanation in the statute. Thus, we hold that, assessee was not liable to deduct TDS under section 195, at the time of making the payment. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the payment of €490,000 to SnamProgetti for the Basic Engineering Design Package (BEDP) constitutes "fees for technical services" (FTS) under section 9(1)(vii) of the Income Tax Act.
2. Whether the assessee was liable to deduct TDS on the payment made to SnamProgetti, considering the services were rendered outside India.

Issue-wise Detailed Analysis:

1. Nature of Payment as Fees for Technical Services (FTS):
The primary issue was whether the payment of €490,000 to SnamProgetti for the Basic Engineering Design Package (BEDP) constituted "fees for technical services" (FTS) under section 9(1)(vii) of the Income Tax Act. The assessee argued that the payment was for the supply of technical know-how and not for rendering services. The CIT(A) held that the payment was indeed for FTS, as the BEDP involved technical services provided by SnamProgetti. The CIT(A) relied on the retrospective amendment to section 9(1)(vii) by the Finance Act, 2010, which clarified that FTS is taxable in India if the services are utilized in India, irrespective of where they are rendered.

2. Liability to Deduct TDS:
The second issue was whether the assessee was liable to deduct TDS on the payment made to SnamProgetti, considering the services were rendered outside India. The assessee contended that, based on the prevailing law at the time of payment, as interpreted by the Supreme Court in Ishikawajma Harima Heavy Industries Ltd vs. DIT, services rendered outside India were not taxable in India. The Tribunal agreed with the assessee, stating that at the time of payment, the law did not require TDS to be deducted for services rendered outside India. The Tribunal emphasized that the retrospective amendment could not impose an obligation that was not present at the time of payment, applying the principle "lex non cogit ad impossibilia" (the law does not compel the impossible).

Conclusion:
The Tribunal concluded that the assessee was not liable to deduct TDS on the payment of €490,000 made to SnamProgetti for BEDP in 2007, as the services were rendered outside India and the law at that time did not mandate such deduction. The appeal of the assessee was allowed.