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TMI Blog2024 (8) TMI 432X X X X Extracts X X X X X X X X Extracts X X X X ..... rospective amendment of Explanation 6 to Section 9 (1) (vi) of the Act, was subject matter of consideration of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd [ 2021 (3) TMI 138 - SUPREME COURT] The Supreme Court affirming the decision of this Court in M/s. NGC Networks (India) Pvt. Ltd. [ 2018 (5) TMI 1148 - BOMBAY HIGH COURT] has held that Explanation 6 cannot have retrospective effect/application. As in our considered opinion, the Revenue s endeavour to retrospectively apply Explanation 4 introduced by Finance Act, 2012 to Section 9 (1) (iv) so as to tax the assessee under such provision cannot be accepted. Decided in favour of assessee. - G. S. KULKARNI SOMASEKHAR SUNDARESAN, JJ. For the Appellant : Mr. Suresh Kumar. For the Respondent : Mr. Madhur Agarwal a/w. Mr. Ketan Dave, Mr. P.C. Tripathi i/b. A.S. Dayal Associates. ORAL ORDER (PER G. S. KULKARNI, J.) 1. These three appeals filed by the revenue under Section 260A of the Income-tax Act, 1961 (for short the Act ) have raised a common question of law in the context of remittance made by the respondent/assessee to a foreign party in relation to the procurement by the assessee of software used in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of royalty, as per the provisions of Section 9 (1) (vi) of the Act. It was hence held that the income of such supplier on such transaction was deemed to have accrued in India, for which the assessee was liable to deduct tax at source under Section 40(a)(i) of the Act. The Assessing Officer accordingly, passed an order directing the assessee to deduct TDS at the rate of 20.5% on the gross amount of license fees payable to the foreign supplier. The application of the assessee filed under Section 195 (2) of the Act was accordingly rejected. 6. The assessee being aggrieved by the said order passed by the Assessing Officer filed an appeal before the Commissioner of Income Tax (Appeals), Mumbai [for short, CIT(A) ]. The CIT(A) following his own order in assessee s own case held that the payment made by the assessee for purchase of software did not amount to payment of royalty. The CIT(A) held that under the agreement in question, the assessee had the right to use the software for its internal business purpose only and not for any commercial exploitation. 7. The Revenue being aggrieved by such order passed by the CIT(A), filed an appeal before the Tribunal. By the impugned order, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer was correct in its view that the amounts which were remitted to the foreign suppliers could be taxed as royalty under the provisions of Section 9 (1) (vi) of the Act. The CIT(A) and the Tribunal have returned concurrent findings that considering the nature of the transaction and the placement of the assessee and the foreign suppliers, the payments as made by the assessee are not in the nature of royalty and for such reason, it would not be incumbent for the assessee to deduct tax at source under Section 40 (a) (i) of the Act. It was observed that the entire basis for the Assessing Officer to take a view that the assessee was liable to deduct tax at source, was in considering the applicability of Explanation 6 as Section 9 (1) (vi) of the Act as incorporated by the Finance Act, 2012. 10. The effect and application of an Explanation was subject matter of consideration before this Court in The Commissioner of Income Tax 11 v/s. M/s. NGC Networks (India) Pvt. Ltd. Income Tax Appeal No.397 of 2015, decided on 29.01.2018. In such decision, the Court referring to the legal maxim lex non cogit ad impossibilia which means that the law does not compel a man to do what he cannot poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Kerala High Court in Commissioner of Income tax vs. S.R. Patton [1992] 193 ITR 49, while following the Gujarat High Court's decision in S.G. Pgnatale s case (supra), to hold that the Explanation was not declaratory but widened the scope of Section 9 (1) (ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9 (1) (ii) of the Act, it did not operate in respect of periods which were prior to 1.4.1979. It was held that since the Explanation came into force from 1.4.1979, it could not be relied on for any purpose for an anterior period. 17. In the appeal preferred from the decision by the Revenue before this Court, the Revenue did not question this reading of the Explanation by the Kerala High Court, but restricted itself to a question of fact viz., whether the Tribunal had correctly found that the salary of the assessee was paid by a foreign company. This Court dismissed the appeal holding it was a question of fact. [ Commissioner of Income tax vs. S.R. Patton (1998) 8 SCC 608]. 18. Given this legislative history of Section 9 (1) (ii), we can only assume that it was deliberately introduced with e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in The Commissioner of Income Tax 11 v/s. M/s. NGC Networks (India) Pvt. Ltd. (supra) on non-retrospective amendment of Explanation 6 to Section 9 (1) (vi) of the Act, was subject matter of consideration of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. V. Commissioner of Income Tax[2021] 125 taxmann.com 42 (SC) . The Supreme Court affirming the decision of this Court in The Commissioner of Income Tax 11 v/s. M/s. NGC Networks (India) Pvt. Ltd. (supra) has held that Explanation 6 cannot have retrospective effect/application. The observations of the Supreme Court are required to be noted which read thus:- 82. As a matter of fact, even under the Income Tax Act, the High Court of Bombay has taken a view, applying the aforestated maxims in the context of the provisions of the relevant DTAAs, to hold that persons are not obligated to do the impossible, i.e., to apply a provision of a statute when it was not actually and factually on the statute book. 83. In CIT v. NGC Networks (India) Pvt. Ltd., [IT Appeal No. 397 of 2015, dated 29-1-2018] a question arose as to the applicability of explanation 6 to Section 9 (1) (vi), in the context of section 194J of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Once the salary is paid by the employer after deducting tax at source as per the law prevailing on the date of paying the salary, then any subsequent amendment in law brought about retrospectively cannot require the employer to deduct tax at source for the past period, because the salary for that period has already been paid. Consequently, the employer cannot be made liable for the consequences set out in Section 201 of the Act on account of the retrospective amendment to Section 17 (2) of the Act. 85. It is thus clear that the 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. 13. In the light of the above discussion, in our considered opinion, the Revenue s endeavour to retrospectively apply Explanation 4 introduced by Finance Act, 2012 to Section 9 (1) (iv) so as to tax the assessee under such provision cannot be accepted. 14. In the light of the aforesaid discussion, this appeal would not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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