Not liable to Deduct TDS in case amendment with retrospective effect

By | March 23, 2016

Facts of the case

The assessee company has made payment to M/s Holcim Group Support Ltd, (HGSL), a resident company of Switzerland.  The assessee has not deducted TDS in respect of following payments which were on account of training conducted by the Switzerland company outside India.

Issue

why disallowance under section 40(a)(i) should not be made ?

Assessee View

The Ld. Counsel submitted that, assessee had made the payment mainly in the year 2009. At the time of making the payment, there was a decision of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra), which provided that, if the services has been rendered outside India and not utilized in India then, assessee was not liable to deduct TDS. The amendment brought in section 9(1)(vii) by insertion of an explanation with retrospective effect came into statute only after the President of India’s assent in May, 2010. Thus, assessee could not have visualized that such a provision would come in the future date. In support of his contention, he strongly relied upon a decision of ITAT Bench in the case of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITD 49 (Mum.) and has also filed compilation of various other Tribunal decisions, wherein, it has been held that assessee cannot be held to be liable to deduct TDS when the amendment has been brought subsequently with retrospective effect.

Held

Although, such an amendment has been brought in the statute with retrospective effect but at the time of making the payment there was no such provision under the Act and in fact, the law of the land as laid down by the Hon’ble Supreme Court was that, if the services has not been rendered in India and such services are not utilized in India then there is no liability for deducting TDS. The amendment has been brought specifically to negate the decision of Hon’ble Supreme Court. An assessee who has to make the payment cannot visualize or apprehend that in future a retrospective amendment would be brought whereby it would require withholding of tax. Even if the purported amendment has been brought with the intention to clarify the provision but there was no such judicial interpretation that payments made to non-residents for rendering of services in India is taxable in India in absence of any business connection in India or PE in India and in the absence of any clear-cut law, assessee cannot be held to be liable to deduct TDS. It is a trite legal maxim. “lex non cogit ad impossiblia” which means that, the law cannot possibly compel a person to do something which is impossible to perform. Thus, we hold that, at the time of making the payment, assessee could not have visualize to deduct TDS when there was no provision under the Act and in fact, there was a already prevailing law laid down by the Hon’ble Supreme Court that in such a case, no TDS was to be deducted, then obvious conclusion is that on such payment no disallowance under section 40(a)(i) can be made.

IN THE ITAT MUMBAI BENCH ‘D’

Holcim Services South Asia Ltd.

v.

Deputy Commissioner of Income-tax, Range- 8 (2), Mumbai

AMIT SHUKLA, JUDICIAL MEMBER
AND RAMIT KOCHAR, ACCOUNTANT MEMBER

IT APPEAL NO. 2357 (MUM.) OF 2014
[ASSESSMENT YEAR 2010-11]

FEBRUARY  2, 2016

Kirit Kamdar for the Appellant. Sachhidanand Dubey for the Respondent.

ORDER

Amit Shukla, Judicial Member – The aforesaid appeal has been filed by the assessee against impugned order dated 03.02.2014, passed by CIT(A)-27, Mumbai for the quantum of assessment passed under section 143(3) for the assessment year 2010-11, on following grounds of appeal:—

“1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the disallowance of Rs 33,93,493/-under section 40(a)(i) of the Income-tax Act, 1961 (Act), for payment made by the Appellant to its overseas group entity for participating in various training programs undertaken outside India, on account of failure on the part of the Appellant to withhold tax thereon under section 195 of the Act.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not appreciating the fact that retrospective amendment to section 9(1) was inserted by Finance Act 2010 with effect from 1st June 1976 only after end of the financial year and was hit by the doctrine of ‘impossibility of performance’.
3. Without prejudice to the above grounds of appeal, the Appellant submits that payments made for attending induction Seminar, Leadership Seminar, participation fees for ICCA APAC etc. were not in nature of Fees for Technical Services liable for withholding under section 195 of the Act”.

2. The facts in brief are that, the assessee company has made payment of Rs. 65,47,213/- to M/s Holcim Group Support Ltd, (HGSL), a resident company of Switzerland. The assessee’s case before the AO was that, the said payment was made on account of participation fees payable for HSSA’s delegate of assessee-company to various training programmes organized by HGSL during the year. Tax was deducted wherever it was applicable and has been deposited by the assessee. The details of break-up and nature of payment made to Switzerland company as pointed by the AO has been elaborated at Para 5.1. However, he noted that, the assessee has not deducted TDS in respect of following payments which were on account of training conducted by the Switzerland company outside India:

Sr. No. Particulars Amount (Rs.)
1 Being payment towards HARP training fees 1,42,848
2 Being payment towards training for management fees 11,24,928
3 Being payment towards induction seminar 17,468
4 Being HARP training fees 2,64,148
5 Being charges for Leadership seminar 6,23,076
6 Being fees for harpist workshop at Zurich 1,35,200
7 Being fee for leadership seminar at Lausanne 5,78,825
8 Being fees for ICCA APAC 2010 5,07,000
Total 33,93,493

3. The AO, in response to the show cause notice as to why disallowance under section 40(a)(i) should not be made, to which the assessee submitted that, it was under a bona fide belief that payment made to Switzerland company for survives (services-ed) rendered outside India would not fall within the ambit of section 9(1)(vii). Since, here in this case the payment related to the services rendered by a non-resident company outside India, therefore, no TDS was required to be deducted by assessee. This view and belief was stated to be derived from the decision of Hon’ble Supreme Court in the case ofIshikawajma-Harima Heavy Industries Ltd v. DIT [2007] 288 ITR 408  wherein, it has been held that services rendered outside India will be taxable in India only, if the services has been rendered in India and such services have been utilized in India. In the case of the assessee, the services have been rendered by HGSL outside India and therefore, in view of the principles laid down by the Hon’ble Supreme Court assessee had not deducted TDS. Besides this, it was also submitted that, explanation brought by the Finance Act, 2010 with retrospective effect from 1st June, 1976 cannot be held to be applicable at the time of making the payment. However, the Ld. AO rejected the assessee’s contention and after detailed discussion held that, the payment was taxable as ‘fees for technical services’ within section 9(1)(vii) and assessee should have deducted TDS. The decision of Hon’ble Supreme Court will not be applicable or is no longer valid in view of explanation inserted w.e.f. 1st June, 1976.

4. The Ld. CIT(A) held that the Explanation to a statutory provision is to remove the ambiguity which may have crept in while interpreting the section/statutory provision. Here Explanation has widen the scope of section to give the true intent of the legislature. For this proposition he has referred to commentary in “interpretation of statutes” and decision of Supreme Court in the case of S. Sundaram Pillai v. V.R. Pattabiraman AIR 1985 SC 582 and host of other decisions. After referring to these decisions, he held that explanation is merely an additional support to the dominant provision of the Act. It tries to remove the vagueness-crept in the main enactment; therefore, the explanation here merely qualifies for provisions of section 9(1)(vii). After detailed discussions, he confirmed the said disallowance.

4.1 Before us, the Ld. Counsel submitted that, assessee had made the payment mainly in the year 2009. At the time of making the payment, there was a decision of Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra), which provided that, if the services has been rendered outside India and not utilized in India then, assessee was not liable to deduct TDS. The amendment brought in section 9(1)(vii) by insertion of an explanation with retrospective effect came into statute only after the President of India’s assent in May, 2010. Thus, assessee could not have visualized that such a provision would come in the future date. In support of his contention, he strongly relied upon a decision of ITAT Bench in the case of Channel Guide India Ltd. v. Asstt. CIT [2012] 139 ITD 49 (Mum.) and has also filed compilation of various other Tribunal decisions, wherein, it has been held that assessee cannot be held to be liable to deduct TDS when the amendment has been brought subsequently with retrospective effect.

4.2 On the other hand, Ld. DR strongly relied upon the order of the CIT(A) and submitted that the retrospective amendment means that, law was always like that and strict compliance has to be made.

5. We have heard the rival contentions and also perused the relevant findings given in the impugned order. It is an undisputed fact that the assessee has made payment to HGSL which is a nonresident company based at Switzerland. The payment has been made for training conducted by the HGSL to its delegates outside India. It is an admitted fact here that neither the services have been rendered in India nor such services have been utilized in India. Out of the total payment of Rs. 65,49,217/-, the assessee had not deducted TDS on the payment aggregating to Rs. 33,93,493/- (on the balance amount TDS has been deducted), on the ground that, such payment relate to services rendered outside India. The revenue’s case is that, in view of the Explanation brought in the statute by the Finance Act, 2010 which got the President’s assent in May, 2010 has been brought in the statute with retrospective effect form 1st June, 1976 and such an Explanation is clarificatory in nature which now provides that, the income of a non-resident shall be deemed to accrue in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included to the total income of the non-resident, whether or not the non-resident has resident (sic) or place of business or business connection in India or a non-resident has rendered services in India. Though, such an amendment has been brought in the statute with retrospective effect but at the time of making the payment there was no such provision under the Act and in fact, the law of the land as laid down by the Hon’ble Supreme Court was that, if the services has not been rendered in India and such services are not utilized in India then there is no liability for deducting TDS. The amendment has been brought specifically to negate the decision of Hon’ble Supreme Court. An assessee who has to make the payment cannot visualize or apprehend that in future a retrospective amendment would be brought whereby it would require withholding of tax. Even if the purported amendment has been brought with the intention to clarify the provision but there was no such judicial interpretation that payments made to non-residents for rendering of services in India is taxable in India in absence of any business connection in India or PE in India and in the absence of any clear-cut law, assessee cannot be held to be liable to deduct TDS. It is a trite legal maxim. “lex non cogit ad impossiblia” which means that, the law cannot possibly compel a person to do something which is impossible to perform. Thus, we hold that, at the time of making the payment, assessee could not have visualize to deduct TDS when there was no provision under the Act and in fact, there was a already prevailing law laid down by the Hon’ble Supreme Court that in such a case, no TDS was to be deducted, then obvious conclusion is that on such payment no disallowance under section 40(a)(i) can be made. If the view and contention raised by the revenue is to be accepted that such a law fixing the liability on the assessee is to be reckoned from retrospective date, then it will cause not only great hardship and injustice but also prejudice to the assessee. Accordingly, we hold that, disallowance under section 40(a)(i) on account of any retrospective amendment is wholly vitiated and cannot be sustained. Accordingly, ground raised by the assessee is allowed.

6. In the result, appeal of the assessee stands allowed.

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