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2021 (3) TMI 1121 - AT - Income TaxTDS u/s 195 - Assessee made payments to Celltick Israel towards license fees pursuant to the distribution agreement entered between them - assessee while making payment to Celltick Israel deducted withholding tax for the period April 2013 to August 2013. The assessee made further payments without deducting TDS for the reason that the income of the payee is not taxable in India as the transaction of the payee comes under article 7 of the Indo Israel Treaty - whether the amendments made in Section 40(a)(i) is applicable retrospective or not? - HELD THAT - The payee has already furnished certificate from a chartered accountant, return of income and computation of income under section 139. Further we also noticed that the income of the payee is not chargeable to tax in India as per the decision of the coordinate bench. Even though as submitted by learned DR that the matter of payee is pending before High Court. In our view, as far as the current position available on record that the income of the payee is not chargeable to tax in India. It is clear that the 2nd proviso to section 40(a)(ia) and section 40(a)(i) are evenly worded and Pari materia to each other. Both the provisions were introduced by the legislature in order to remove the anomaly and curative in nature. In the case of section 40(a)(ia) the Hon ble Bombay High Court in the case of Perfect Circle India Pvt. Ltd. 2019 (1) TMI 1532 - BOMBAY HIGH COURT and in the case of Ansal Land Mark Township (P) Ltd. 2015 (9) TMI 79 - DELHI HIGH COURT have already held that these provisions are applicable retrospectively with effect from 01.04.2005. Since the amendment was carried out in order to remove the anomalies in the sections similar to section 40(a)(ia) and in our considered view, the amendment in section 40(a)(i) is also made in order to remove the anomaly and it is no doubt curative in nature. Therefore, considering the findings of the Hon ble High Courts, in our view the amendment to the section 40(a)(i) is also applicable retrospectively. Considering our observation in the above paragraphs, in our considered view, the documents submitted before us clearly shows that the income of the payee is not taxable in India and assessee has already filed the relevant information u/s 201(1) of the Act which shows that the assessee cannot be regarded as assessee in default . Therefore, we set aside the order passed by the AO under section 143(3) of the Act. Considering the above discussion, the additional ground raised by the assessee is allowed.
Issues Involved:
1. Non-taxability of the remittances by the Appellant as 'royalties' under the India-Israel Tax Treaty. 2. Disallowance under Section 40(a)(i) of the Act due to non-deduction of taxes at source. 3. Applicability of Article 7 or Article 12 of the India-Israel Tax Treaty. 4. Retrospective effect of the second proviso to section 40(a)(i) and its applicability. Issue-wise Detailed Analysis: 1. Non-taxability of the remittances by the Appellant as 'royalties' under the India-Israel Tax Treaty: The assessee argued that the remittances made to Celltick Technologies Ltd Israel for software solutions are not taxable in India as 'royalties' under Article 12 of the India-Israel Tax Treaty. The assessee claimed the benefit of Article 7 of the treaty, asserting that the income is not chargeable to tax in India since Celltick Israel is a tax resident in Israel. The assessing officer, however, rejected this contention and treated the payments as royalties, thereby invoking Section 40(a)(i) of the Act to disallow the payments. 2. Disallowance under Section 40(a)(i) of the Act due to non-deduction of taxes at source: The assessing officer observed that the assessee deducted tax at the rate of 10% on license fees paid from April 2013 to August 2013 but failed to deduct tax for subsequent payments amounting to ?6,98,38,225/-. Consequently, the assessing officer disallowed these payments under Section 40(a)(i) of the Act. The Ld. CIT(A) upheld this disallowance, leading the assessee to appeal. 3. Applicability of Article 7 or Article 12 of the India-Israel Tax Treaty: The assessee contended that even if Celltick Israel had a permanent establishment (PE) in India, the remittances should be governed by Article 7 (Business Profits) and not Article 12 (Royalties) of the India-Israel Tax Treaty. The Ld. CIT(A), however, held that the remittances fall under Article 12 and sustained the disallowance. The assessee argued that the income earned by Celltick Israel was at arm's length and no further income was attributable to it, as held by the ITAT for AYs 2012-13 to 2014-15 and by the Dispute Resolution Panel for AY 2015-16. 4. Retrospective effect of the second proviso to section 40(a)(i) and its applicability: The assessee raised an additional ground of appeal, arguing that the second proviso to section 40(a)(i), inserted w.e.f 01.04.2020, should be applied retrospectively from 01.04.2005. This proviso states that if the payee has filed a return of income, taken into account the payment, and paid the due tax, the assessee should not be deemed in default. The assessee provided a certificate from a chartered accountant and the payee's return of income. The Tribunal agreed with the assessee, noting that similar provisions in section 40(a)(ia) had been held to be retrospective by various High Courts, thus applying the amendment retrospectively to section 40(a)(i) as well. Conclusion: The Tribunal concluded that the income of the payee (Celltick Israel) was not taxable in India, as per the decision of the coordinate bench. The documents submitted indicated that the assessee was not in default under section 201(1) of the Act. Consequently, the Tribunal set aside the order of the assessing officer and allowed the additional ground raised by the assessee, while dismissing the main grounds as infructuous. The appeal was partly allowed. Order Pronounced: The appeal filed by the assessee was partly allowed, with the order pronounced in the open court on 26/03/2021.
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