2022 (3) TMI 1023 - AT - Income Tax

Disallowance of expenses u/s.40(a)(ia) - Non deduction of TDS u/s 195 - payment towards Internet Private Line Charges (IPLC) - AO considering amendment to provisions of section 9(1)(vi) / 9(1)(vii) by the Finance Act, 2012, with retrospective effect from 01.06.1976, held that payment made by the assessee to non-resident is in the nature of royalty within the meaning of section 9(1)(vi) read with Article 12 of the DTAA between India and USA - HELD THAT - In the present case, payment made by the assessee to non-residents was prior to amended definition of royalty by the Finance Act, 2012. Further, at the time of payment made by the assessee to non-residents, there was an ambiguity in the definition of royalty and because of this the assessee could not deduct TDS as per provisions of section 195 - Although, the definition has been amended by the Finance Act, 2012, with retrospective effect, but because there was an ambiguity in the definition, the assessee cannot do impossible things by foreseeing an amendment to the definition of royalty and deduct TDS on payment made to non-residents. This principle is supported by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd . 2021 (3) TMI 138 - SUPREME COURT where it was held that person mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by Explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. Therefore, we are of the considered view that the Assessing Officer was erred in making addition towards payment made to non-residents u/s.40(a)(ia) of the Act, for non-deduction of TDS u/s.195 - Assessee appeal allowed.

Issues:
1. Disallowance of payment towards Internet Private Line Charges (IPLC) for non-deduction of tax at source u/s 195 of the Act.
2. Interpretation of the term 'Royalty' in the context of payments made to non-residents.
3. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA.
4. Consideration of retrospective amendment brought in Finance Act 2012 regarding TDS deduction.
5. Violation of principles of natural justice in passing the impugned order.

Issue 1: Disallowance of payment towards IPLC for non-deduction of TDS:
The appeal challenged the disallowance of payment towards Internet Private Line Charges (IPLC) to a non-resident service provider for non-deduction of tax at source u/s 195 of the Income Tax Act. The Assessing Officer considered the payment as royalty under section 9(1)(vi) read with Article 12 of the DTAA between India and USA, leading to the disallowance. The Tribunal disagreed with this view, citing ambiguity in the definition of royalty before the retrospective amendment by the Finance Act 2012. It held that the ambiguity prevented the assessee from foreseeing the amendment and deducting TDS, thus reversing the disallowance.

Issue 2: Interpretation of the term 'Royalty' for non-resident payments:
The dispute revolved around whether payments made to non-residents for services rendered outside India should be classified as royalty or fees for technical services. The Tribunal noted that the services in question were provided through equipment in the USA and accessed by the assessee in India. It analyzed the definition of royalty under section 9(1)(vi) / 9(1)(vii) and the DTAA, ultimately ruling that the payments for Internet Private Line Charges fell within the definition of royalty, contrary to the assessee's argument.

Issue 3: Applicability of DTAA between India and USA:
The Tribunal considered the DTAA between India and the USA in assessing the taxability of payments made to non-residents. It emphasized the importance of understanding the terms of the DTAA in determining whether the payments constituted royalty, as per the provisions of the agreement.

Issue 4: Retrospective amendment in Finance Act 2012 regarding TDS deduction:
The Tribunal deliberated on the retrospective amendment introduced by the Finance Act 2012, which expanded the definition of royalty. It acknowledged that the ambiguity in the definition before the amendment prevented the assessee from deducting TDS. Relying on the principle that the assessee cannot be expected to foresee such amendments, the Tribunal held that the disallowance of payments for non-deduction of TDS was unwarranted.

Issue 5: Violation of principles of natural justice in passing the order:
The appeal raised concerns regarding the lack of proper opportunity given before the impugned order was passed. The Tribunal highlighted the importance of adhering to principles of natural justice, emphasizing that any order passed in violation of these principles would be considered null and void in law.

In conclusion, the Tribunal allowed the appeal filed by the assessee, overturning the disallowance of payments made to non-residents for non-deduction of TDS u/s 195 of the Income Tax Act, 1961. The decision was based on the ambiguity in the definition of royalty before the retrospective amendment, emphasizing the impossibility of the assessee foreseeing such changes and deducting TDS accordingly.

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