2017 (4) TMI 1027 - AT - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(i) - payment made to non- residents situated outside India without the deduction of tax source - payment of warehouse charges - Held that - Admittedly the disallowance made by the Ld. AO is only for non- deduction of tax at source and accordingly only the provisions of section 40(a)(i) of the Act is invoked by him. There is no dispute as to the allowability of such payments as an eligible deduction otherwise. We also find that expecting a person to foresee the future amendment in the statute vis-a- vis tax withholding liability would only result in impossibility of performance on the part of the tax deductor. We also find that the Hon ble Supreme Court in the case of Krishnaswamy S. Pd. and Anr. v. Union of India (2006 (2) TMI 75 - SUPREME Court ) has also accepted and approved this legal maxim. In view of these findings and respectfully following the various judicial decisions relied upon herein above, we have no hesitation in directing the Ld. AO to delete the disallowance of payment of warehouse charges u/s. 40(a)(i). Payment of warehousing charges to Camrette Logistics Inc. USA - Held that - Applying the definition of FIS in the Treaty to the facts of the present case in the light of the various decisions referred to above, it cannot be said that the rendering of services by the non residents to the assessee made available to the assessee, such services , for its future use or utilization on a reasonably permanent basis. Hence the payments made thereon by the assessee would not fall under the ambit of fees for technical services or fees for included services as per the treaty. The provisions of section 90(2) of the Act are very clear that the assessee is entitled to take the benefit of the treaty if the same is beneficial to it. Hence the provisions of the treaty would prevail over the Act. - Decided in favour of assessee. Disallowance made u/s 40(a)(i) in respect of payments made for professional / technical services -Held that - We find from the nature of services rendered by TRW Automobile Japan and TRW Automobile USA , though the same fall under the ambit of Fees for Technical Services as per the provisions of the Act, but the same does not fall as such as per the respective DTAAs in view of the fact that it cannot be said that the rendering of services by the non residents to the assessee made available to the assessee , such services , for its future use or utilization on a reasonably permanent basis. For the detailed reasoning given on the make available theory, we hold that the subject mentioned payments made to TRW Automobile Japan and TRW Automobile USA by the assessee would not fall under the ambit of fees for technical services or fees for included services as per the treaty. The provisions of section 90(2) of the Act are very clear that the assessee is entitled to take the benefit of the treaty if the same is beneficial to it. Hence the provisions of the treaty would prevail over the Act. Hence we hold that the assessee is not obligated to deduct tax at source and hence no disallowance u/s 40(a)(i) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act for non-deduction of tax at source on payments made to non-residents.
2. Determination of whether the payments made to non-residents qualify as "Fee for Technical Services" (FTS) under Section 9(1)(vii) of the Income Tax Act and relevant Double Taxation Avoidance Agreements (DTAAs).
3. Applicability of retrospective amendments to Section 9(2) of the Income Tax Act for TDS obligations.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) of the Income Tax Act:
The primary issue was whether the disallowance under Section 40(a)(i) could be invoked due to non-deduction of tax at source on payments made to non-residents. The payments were made to Alianza Estrategica Portuaria, Mexico, Camrett Logistics Inc., USA, and Strategic Outsourcing Solutions, USA, for warehousing and logistic services rendered outside India. The Assessing Officer (AO) held that these payments were for management support services, which fall under the ambit of FTS under Section 9(1)(vii) of the Act, and thus, were chargeable to tax in India, warranting TDS under Section 195. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision.

2. Determination of "Fee for Technical Services" (FTS):
The assessee argued that the payments for warehousing and logistic services did not involve managerial, technical, or consultancy knowledge and thus did not qualify as FTS. The Tribunal found that the services rendered were purely logistic and did not involve any technical skill, expertise, or transfer of technology, which would categorize them as FTS. It was also noted that these services would be considered business income taxable only if the non-resident had a Permanent Establishment (PE) in India, which they did not.

3. Applicability of Retrospective Amendments:
The Tribunal addressed the retrospective amendment to Section 9(2) of the Act, which was introduced by the Finance Act, 2010, with effect from 01.06.1976. It was held that while this amendment could apply to the taxability of income, it could not be applied retrospectively to TDS obligations. The Tribunal emphasized that the tax deductor could not be expected to foresee future amendments and comply with them retrospectively. The principle of "Lex non Cogit ad Impossiblia" (the law does not compel a person to do something impossible) was invoked to support this view.

Separate Judgments Delivered by the Tribunal:

Payments to Alianza Estrategica Portuaria, Mexico:
The Tribunal directed the AO to delete the disallowance of ?26,09,058 under Section 40(a)(i), as the services rendered were purely logistic and did not qualify as FTS.

Payments to Camrett Logistics Inc., USA, and Strategic Outsourcing Solutions, USA:
The Tribunal held that the payments for sorting services did not "make available" any technology, skill, or expertise to the assessee, as required under Article 12 of the Indo-US DTAA. Consequently, these payments did not fall under the ambit of FTS or Fees for Included Services (FIS) as per the treaty. The Tribunal directed the deletion of the disallowance of ?26,55,949 and ?33,925, respectively.

Payments to TRW Automotive Japan and TRW Automotive USA:
The Tribunal found that the payments for professional and technical services rendered outside India did not fall under the ambit of FTS as per the Indo-Japan and Indo-US DTAAs. It was held that these services did not "make available" any technical knowledge or skill to the assessee for future use. Thus, the Tribunal directed the deletion of the disallowance of ?12,35,193 under Section 40(a)(i).

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of disallowances under Section 40(a)(i) for payments made to non-residents for warehousing, logistic, and technical services rendered outside India, as these did not qualify as FTS or FIS under the relevant DTAAs, and the retrospective amendment to Section 9(2) could not apply to TDS obligations.