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TMI Blog2022 (9) TMI 355X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Finance Act, 2010, w.r.e.f 01.06.1976. The newly substituted Explanation provides that income is deemed to accrue or arise in India whether or not the nonresident has a residence or place of business or business connection in India; or whether or not the non-resident has rendered services in India. In other words, the even if the services are not rendered in India, the income of the non-resident is deemed to accrue or arise India. The said Explanation was made retrospective with effect from 01.06.1976. We hold that the Explanation substituted by the Finance Act, 2010 w.r.e.f 01.06.1976 does not apply to the case of assessee (person responsible for deducting tax at source). Hence, the assessee is not liable to deduct tax at source for the reason that consideration received by the STI from the assessee could not have been regarded as income deemed to accrue or arise in India as per the law then existing. Since, we hold that the assessee is not liable to deduct tax at source at the relevant point of time, the other contentions raised by the assessee, whether payment made to STI is income deemed to accrue or arise in India is not adjudicated and is left open. Whether as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerned, the same is a High Court directive case. We shall first adjudicate the High Court directive case. ITA No.715/Bang/2014 (M/s.Subex Technologies Limited) 3. The Tribunal had disposed of the above case vide its order dated 29.07.2016. The Tribunal decided the issue in favour of the assessee. The Tribunal held that the payment made to the Associate Enterprise (AE) in USA amounting to Rs.62,49,83,348 was merely a journal entry, hence, need for tax deduction at source u/s 195 of the I.T.Act does not arise and the lower authorities erred in disallowing the impugned expenditure u/s 40(a)(i) of the I.T.Act. The Revenue being aggrieved by the order of the ITAT, filed an appeal before the Hon ble High Court u/s 260A of the I.T.Act. The Hon ble High Court vide judgment dated 21.12.2020 in ITA No.180/2017, restored the matter to the ITAT. The Hon ble High Court directed the Tribunal to consider afresh, the claim of the assessee u/s 40(a)(i) of the I.T.Act. The relevant finding of the Hon ble High Court reads as follow:- 10. Thus, from perusal of the aforesaid paragraph, it is evident that the tribunal has merely recorded its conclusion and has not assigned any reasons in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds and elaborate written submissions. The CIT(A), during the course of appellate proceedings, called for a remand report from the A.O. The A.O. on 31.12.2013 submitted the remand report to the written submissions filed by the assessee. In response to the same, the assessee filed a rejoinder. All the contentions raised before the first appellate authority was rejected and the appeal of the assessee was dismissed. The CIT(A) held that 87% of the gross receipts of the assessee was passed on to the STI and it is only reasonable to conclude that the services rendered by STI were vital and crucial to the business of the assessee and not merely a support service. Therefore, it was concluded by the CIT(A) that all evidence on record points to the fact that the payments are in the nature of FTS and tax was required to be deducted at source. 6. Aggrieved by the order of the CIT(A), the assessee preferred appeal before the Tribunal. As mentioned earlier, the Tribunal disposed of the matter in favour of the assessee by holding that the payment was merely a journal entry, hence, there was no necessity of tax deduction at source u/s 195 of the I.T.Act. On further appeal, the Hon ble High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lear that the territory of rendering of services by STI is not material and not germane to deciding the taxability of income u/s 9(1)(vii) of the Act. 11. We shall first adjudicate the contention of the learned AR that the assessee cannot be held liable for default in not deducting tax at source, when there was no such liability as per the law in force at the that time. As per the law prevalent during the assessment year 2008-2009, the income is deemed to accrue or arise in India only when the services are rendered in India and as well as utilized in India. The Hon ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) has held that for Section 9(1)(vii) of the I.T.Act to be applicable, it is necessary that services provided by a non-resident assessee under a contract should not only be utilized within India, but should also be rendered in India or should have such a live link with India that entire income from fees as envisaged in Article 12 of DTAA becomes taxable in India. The Hon ble Apex Court also held that whatever is payable by a resident to a non-resident by way of fees for technical services would not always come with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer to the Memorandum explaining the Finance Bill, 2007. Therefore, it is explicit from the reading of section 9(1)(vii)(c ) and Explanation to section 9(2) that the ration laid down by the Supreme Court in Ishikawajma Harima Heavy Industries Ltd. s case (supra) still holds the field. 13. In the instant case, the impugned assessment year is A.Y. 2008-2009. The law that was applicable is the law which existed during the impugned assessment year i.e., the aforesaid Explanation inserted by the Finance Act, 2007 and the laid down by the Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC). In other words, the income is deemed to accrue or arise in India in the hands of the recipient when the services are rendered in India as well as utilized in India. In the instant case, admittedly, services by STI to the assessee are not rendered in India. The aforesaid Explanation was thereafter substituted by the Finance Act, 2010, w.r.e.f 01.06.1976. The newly substituted Explanation reads as follows: Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18(BOM)]/(2021) 432 ITR 326 (Bom). The same is approved in Engineering Analysis Centre of Excellence Private Limited Engineering [supra]. 17. The Hon ble High Court of Bombay in the case of CIT v. KPMG TS-602-HC-2019(Bom), had held as under:- 7. In any view of the matter, the impugned order further holds that at the relevant time there was no obligation to deduct tax at source in respect of fees paid to service providers, on the basis of its deemed income under Section 9(1)(vii) of the Act. It was only by the amendment made by the Finance Act, 2010 with retrospective effect by adding an Explanation to Section 9(1)(vii) of the Act, that the requirement of the service providers providing the same in India was done away with, for its application. Thus, making it deemed income subject to tax in India and require tax deduction at source by the respondent. However, the Tribunal held that yet the obligation to deduct tax cannot be created with the aid of an amendment made with retrospective effect, when such obligation was absent at the time of making payment to the service providers. 11. So also, question (ii) as proposed is academic as no occasion to deduct tax at so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force . When these obligations are to be discharged at the point of time when payment is made or credited, whichever is earlier, such obligations can only be discharged in the light of the law as it stands that point of time. Section 40(a)(i) provides that, inter alia, notwithstanding anything to the contrary in sections 30 to 38, any amount payable outside India, or payable in India to a non-resident, shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession' on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted . The disallowance under section 40(a)(i) is not for the payments made to non-residents, which are taxable in India, but for the payments on which tax was deductible at source but tax has not been deducted, and such deductibility of tax at source, as we have discussed above, has to be in the light of the legal position as it stood at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Sarkar Builders (2015) 375 ITR 392 (SC) (para 12); Life Insurance Corporation of India v. CIT [1996] 85 Taxman 313 (SC)/[1996] 219 ITR 410 (SC); Gujarat State Plastic Manufacturers Association v. DDIT(E) [2013] 359 ITR 516 (Gujarat) (para 6.3); SLP dismissed in Gujarat State Plastic Manuf. Association v. DDIT [2014] 227 Taxman 380 (SC); V.L.S. Finance Ltd. v. CIT [2007] 289 ITR 286 (Delhi); City Union Bank Ltd. v. ACIT [2020] 425 ITR 475 (Madras) (para 14); Swami Premananda v. CIT [2009] 180 Taxman 368 (Mad. - HC); 22. In view of the aforesaid reasoning and judicial pronouncements, cited supra, we hold that the Explanation substituted by the Finance Act, 2010 w.r.e.f 01.06.1976 does not apply to the case of assessee (person responsible for deducting tax at source). Hence, the assessee is not liable to deduct tax at source for the reason that consideration received by the STI from the assessee could not have been regarded as income deemed to accrue or arise in India as per the law then existing. Since, we hold that the assessee is not liable to deduct tax at source at the relevant point of time, the other contentions raised by the assessee, whether payment ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings the AO had raised the objection with regard to the non-deduction of tax for the payment made by Subex Ltd (parent company) to STI. The parent company filed its submissions. The A.O. passed assessment order dated 30.12.2010 without making any disallowance under section 40(a)(i) of the I.T.Act. Such being the case, there cannot be any question about the allowability of deduction under section 37(1) of the IT Act. It is also to be mentioned that the aforesaid transaction being international transaction, the matter was referred to the TPO and the TPO had accepted the price of the international transaction to be arm s length price. 26. Before concluding, it is to be mentioned that the learned DR had relied on various judicial pronouncements in support of her contentions that Tribunal ought to consider the allowability of expenditure u/s 37 of the I.T.Act.We shall deal with each of these judgments / orders relied on by the learned DR as under:- (i) Sogefi MNR Filteration India (P) Ltd., vs. DCIT [2022] 140 taxmann.com 335 (Bangalore - Trib.): In the above case, none appeared for the assessee. The Tribunal decided to remand the matter to the AO to exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities below cannot be made by the Tribunal, but, within the subject-matter of appeal, the Tribunal can examine any aspect of the matter - whether the same has been examined by the authorities below or not The only limitation to this power perhaps is that it should not expand the scope of the appeal in terms of the income sought to be taxed or disallowance sought to be made, and that both the parties should have adequate opportunity of being heard on this issue in terms of the provisions of rule 11 of the Appellate Tribunal Rules, 1963 . Both parties in the above case were in appeal whereas in the present case, the department is not in appeal before the Tribunal. Therefore, the finding of the Tribunal to the effect that Undoubtedly, in a situation when assessee is in appeal, Tribunal cannot give a finding adverse to the appellant so as to place him in a position worse than what it was before the appeal applies to the present case. Further, in the present case, upon examination of all records and information, lower authorities being satisfied with the claim of section 37(1) of the I.T.Act, proceeded to invoke section 40(a)(i) of the I.T.Act. Hence, the facts in the above case are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -IA of the I.T.Act was the subject matter of appeal before it. It was held that for the purposes of allowability of deduction all conditions provided under section 80-IA of the I.T.Act has to be examined. The Hon'ble Special Bench has held that when the question of allowability of deduction under section 80-IA of the I.T.Act is pending before the Hon'ble Bombay High Court the Tribunal is now functus officio. Hence, the rectification application under section 254(2) of the I.T.Act filed by the Assessee was dismissed. Whereas in the present case, upon examination of all records and information, lower authorities being satisfied with the claim of section 37(1) of the I.T.Act, proceeded to invoke section 40(a)(i) of the I.T.Act. In the first round the Tribunal allowed the assessee's appeal under section 40(a)(i) of the I.T.Act on the basis that there was not requirement for deduction of tax at source. This was taken in appeal by the department to High Court. Neither before the Hon. Tribunal in the first round nor before the Hon. High Court, it was the case of revenue that the assessee is not eligible for deduction under section 37(1) of the I.T.Act. The entire case of depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Trib.) has held that The first aspect which we notice is that the CIT(Appeals) having come to the conclusion that the payment in question was in the nature of FTS within the meaning of Explanation 2 to section 9(l)(vii) of the Act, cannot come to diagonally opposite conclusion that the payment in question is a 'royalty' . Hence, the facts in the above case are distinguishable to the present facts of the case. (vii) Kapurchand Shrimal vs. (IT (1981) 7 Taxman 6 (SC): In the above case, the Hon'ble Apex Court held that the action of the Tribunal in remanding the matter to the ITO was very much within the purview of the powers of the Tribunal. The Hon ble Supreme Court held that It is well know that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeals and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statue. The statue does not say that such a direction cannot be issued by the appellate authority in a case of this nature . However, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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