2021 (10) TMI 210 - AT - Income Tax

TDS u/s 195 - addition u/s 40(a)(i) - non-deduction of tax at source on payment made to non-resident 40(a)(i) of the Act for non-deduction of tax at source on payment made to non-resident - India - Mauritius DTAA - HELD THAT - India-Mauritius DTAA does not cover FTS. Once FTS is not covered under DTAA, then by virtue of residual clause 22 of DTAA between India and Mauritius, said sum can be considered under Article 7 as business profits. Further, as per Article 22, where any item of income of a resident of a contracting state, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention, shall be taxable only in that Contracting State. If you go by Article 22, then if anything not expressly provided in this convention, then same cannot be taxed in India, even if said sum comes under the definition of FTS as per Indian Tax laws. Insofar as, taxation of impugned pay As definition of FTS was amended by the Finance Act, 2010 with retrospective effect from 01.06.1976 but, the law prevailing at the time of making payment by the assessee to the non-resident was on the basis of judgment of Hon'ble Supreme Court Ishikawajma-Harima Heavy Industries Ltd 2007 (1) TMI 91 - SUPREME COURT which clearly held that payment made to a non-resident for services rendered outside India cannot be brought to tax in India as fees for technical services in absence of place of business/permanent establishment in India. Since, there was clear law by the decision of Hon'ble Supreme Court, the assessee has made payment without deducting tax at source. Therefore, liability towards TDS cannot be fastened on the assessee on the basis of subsequent amendment to law with retrospective effect, because it was impossible on the part of assessee to deduct tax on income of non-resident because the assessee cannot foresee the amendment and deduct TDS on said payments. AO as well as the ld. CIT(A) were erred in disallowing payment made to a non-resident u/s. 40(a)(i) of the Act for failure to deduct TDS u/s. 195 - Decided in favour of assessee.

Summary

Issues:
Disallowed expenditure under section 40(a)(i) for non-deduction of tax at source on payment to non-resident.

Analysis:
The appeal concerned disallowance of expenditure under section 40(a)(i) of the Income Tax Act for failure to deduct tax at source on a payment made to a non-resident entity for a market survey. The case revolved around whether the payment qualified as fees for technical services (FTS) under section 9(1)(vii) of the Act and if the non-deduction of tax at source was justified. The Assessing Officer (AO) disallowed the sum, citing the retrospective amendment to section 9(2) of the Act by the Finance Act, 2010, removing the requirement for a non-resident to have a place of business in India. The AO contended that the payment fell under FTS and was subject to tax under section 195 of the Act. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to an appeal before the ITAT.

The ITAT considered the absence of FTS coverage in the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius. It was noted that if DTAA and Indian tax laws conflict, the provision more favorable to the assessee should apply. Since the DTAA did not cover FTS, the payment was analyzed under Article 7 as business profits, which was not taxable due to the lack of a permanent establishment in India. The issue was not the taxability of the payment as FTS but the disallowance under section 40(a)(i) for non-deduction of tax at source.

The ITAT referenced the Supreme Court's judgment in the Ishikawajma-Harima Heavy Industries Ltd. case, emphasizing that services rendered outside India cannot be taxed under Indian law as FTS if no place of business exists in India. The ITAT concluded that the assessee could not have foreseen the retrospective amendment to the law and therefore could not be held liable for non-deduction of tax at source. Citing various tribunal decisions, the ITAT ruled in favor of the assessee, directing the AO to delete the disallowance under section 40(a)(i) of the Act.

In summary, the ITAT allowed the appeal, overturning the disallowance of the payment made to the non-resident entity for failure to deduct tax at source, based on the impossibility of the assessee to foresee the retrospective amendment and deduct tax at the time of payment.