2013 (11) TMI 966 - AT - Income Tax

Leather testing charges paid to non-resident - Tax not deducted at source - Held that - Following Channel Guide India Ltd. v. ACIT 2012 (9) TMI 95 - ITAT MUMBAI The law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the disallowance under section 40(a)(i) cannot be made in a situation in which taxability is confirmed only as a result of retrospective amendment of law - The amount paid to the foreign enterprise was not taxable in India in the light of the legal position at that point of time - It became taxable in India only as a result of the retrospective amendment in Section 9(1), the said payment cannot be disallowed by invoking section 40(a)(i) - It is only as a result of the amendment in Section 9(1), by the virtue of Finance Act 2010, that amount can be said to be taxable in India - Even though the amendment is said to be merely clarifiactory in nature Following the case of Ishikwajima Harima Heavy Industries Ltd. v. DIT 2007 (1) TMI 91 - SUPREME COURT and in view of the fact that services were rendered outside India even if utilized in India, the impugned leather testing fees was not taxable in India - The disallowance under Section 40(a)(i) cannot be invoked on the facts of this case Decided in favour of assessee.

Issues Involved:
1. Justification of the disallowance under Section 40(a)(i) of the Income Tax Act, 1961.
2. Taxability of leather testing charges paid to TUV GmbH under the Indo-German tax treaty.
3. Applicability of retrospective amendments to Section 9(1) and their impact.
4. Interpretation of the term "technical services" under Section 9(1)(vii).
5. Consideration of the exception under Section 9(1)(vii)(b) for a 100% export-oriented unit.
6. Impact of retrospective amendments on tax withholding obligations and related disallowances under Section 40(a)(i).

Detailed Analysis:

1. Justification of the Disallowance under Section 40(a)(i):
The primary issue was whether the disallowance of Rs. 52,07,883 for leather testing charges paid to TUV GmbH was justified under Section 40(a)(i) of the Income Tax Act, 1961, due to the assessee's failure to withhold taxes. The Assessing Officer (AO) disallowed the payment, stating that the assessee did not fulfill the tax withholding obligations. The CIT(A) upheld this view, rejecting the assessee's arguments based on territorial nexus and the Indo-German tax treaty.

2. Taxability of Leather Testing Charges under Indo-German Tax Treaty:
The tribunal examined whether the leather testing charges paid to TUV GmbH were taxable in India under the Indo-German tax treaty. The assessee argued that the expression "may be taxed" in Article 12(1) of the treaty did not mandate taxability in India. However, the tribunal clarified that tax treaties allocate taxing rights and do not impose taxes. Article 12 of the Indo-German tax treaty allows the source state to tax royalties and fees for technical services, subject to a cap of 10%. Therefore, the tribunal concluded that the leather testing charges were taxable in India under the treaty.

3. Applicability of Retrospective Amendments to Section 9(1):
The tribunal addressed the impact of the retrospective amendment to Section 9(1) brought by the Finance Act, 2010, which clarified that income from fees for technical services is taxable in India regardless of the place of business or the location of service rendition. The tribunal referred to the decision in Ashapura Minichem Ltd., which upheld the retrospective amendment, negating the earlier judicial precedents that required the services to be rendered in India for taxability.

4. Interpretation of "Technical Services" under Section 9(1)(vii):
The tribunal analyzed whether the leather testing services provided by TUV GmbH constituted "technical services" under Section 9(1)(vii). It was argued that the testing process was automated and did not involve significant human intervention. However, the tribunal emphasized that technical services involving human intervention are taxable under Section 9(1)(vii). The tribunal rejected the argument that automated services without human involvement are not taxable, highlighting that even minimal human involvement suffices for taxability.

5. Consideration of Exception under Section 9(1)(vii)(b) for 100% Export-Oriented Unit:
The assessee contended that as a 100% export-oriented unit, the source of its income was outside India, and thus, the exception under Section 9(1)(vii)(b) applied. The tribunal clarified that the business was carried on in India, and the customers being outside India did not qualify as a source outside India. The exception applies only when services are utilized in earning income from a source outside India, which was not the case here.

6. Impact of Retrospective Amendments on Tax Withholding Obligations and Related Disallowances:
The tribunal considered the argument that the retrospective amendment to Section 9(1) should not penalize the assessee for non-compliance with tax withholding obligations that were not clear at the time of payment. Referring to the decision in Channel Guide India Ltd., the tribunal held that disallowance under Section 40(a)(i) cannot be made if the taxability of the payment was clarified only through a retrospective amendment. Consequently, the tribunal deleted the disallowance of Rs. 52,07,883, providing relief to the assessee.

Conclusion:
The tribunal partly allowed the appeal, deleting the disallowance of Rs. 52,07,883 under Section 40(a)(i) based on the retrospective amendment argument. The other grounds of appeal were dismissed due to the smallness of the amounts involved. The tribunal's decision emphasized the interpretation of technical services, the applicability of tax treaties, and the impact of retrospective amendments on tax withholding obligations.

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