Income Tax Appellate Tribunal - Ahmedabad
Sterling Abrasives Ltd,, Ahmedabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A" AHMEDABAD
Before Shri N.S.SAINI, ACCOUNTANT MEMBER and
Shri MAHAVIR SINGH, JUDICIAL MEMBER
ITA No.3928/ Ahd/2007
Assessment Year: 2004-05
Date of hearing:12.5.10 Drafted:2.7.10
Sterling Abraive Ltd., V/s. Asstt. Commissioner of
45-46, GIDC, Odhav Income-tax, Circle-8,
Road, Ahmedabad Ahmedabad
PAN No. AACC1266P
(Appellant) .. (Respondent)
Appellant b y :- Shri S.N.Soparkar, Sr-AR
Respondent by:- Dr. Jayant Javeri, SR-DR
ORDER
PER Mahavir Singh Judicial Member:-
This appeal by the assessee is arising out of the order of Commissioner of Income-tax (Appeal)-XIV, Ahmedabad in appeal No. CIT(A) XIV/C. 8/ 185/ 2006-07 dated 17-08-2007. The assessment was framed by DCIT (OSD), Circle-8, Ahmedabad u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 30-11-2006 for assessment year 2004-05.
2. The only issue in this appeal of the assessee is against the order of CIT(A) confirming the disallowance made u/s.40A(a)(i)(A) of the Act, as the assessee has not deducted withholding tax on fees for technical services as per the provisions of DTAA. The assessee has raised the following 5 effective grounds:-
"1. The learned CIT(A) has erred in law and on facts in confirming the action of AO in disallowing Rs.17,92,240/- u/s.40(a)(i)(A) of the Act.
2. The learned CIT(A) has erred in law and on facts in not appreciating that the appellant was not the beneficial owner of Fees for Technical services and ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 2 therefore the provision of DTTA does not apply and therefore the appellant was not required to deduct withholding tax, consequently no disallowance u/s.40(a)(i)(A) was called for.
3. The learned CIT(A) has erred in law and on facts in not appreciating that the Fees for Technical Services were not made available to it and therefore the provisions of DTTTAA does not apply and therefore the appellant was not required to deduct withholding tax, consequently no disallowance u/s.40(a)(i)(A) was called for.
4. The learned CIT(A) has erred in law and on facts in not appreciating that as per the decisions of Hon'ble the Supreme Court in the case of Ishikawajma- Harima Heavy Industries Ltd. Vs. DIT (158 Taxman 259), the appellant was not required to deduct tax at all and precisely for this reason, law ha been retrospectively amended. However retrospective amendment cannot cast a retrospective Burdon of deducting tax.
5. Alternatively and without prejudice, the learned CIT(A) has erred in law and on facts in not appreciating that the appellant received independent personal service which is covered by Article 15 of DTTAA and therefore the appellant was not required to deduct withholding tax, consequently no disallowance u/s.40(a)(i)(A) was called for."
3. The brief facts leading to the above issue are that the assessee-company has made payment to Mr. Jame Whitehead of UK for the services rendered by him under contractual agreement dated 30-01-2003 and the AO has discussed in detail the nature of contractual service rendered and the provisions of Double Taxation Avoidance Agreement and held that the services rendered comes within the purview of technical fees as defined in clause 4© of Article 13 of the DTAA, and hence the assessee was liable to deduct TDS on the payments made to Mr. Whitehead. Since the assessee has failed to do so, the payment made to this person has not to be deducted from the total income under the provisions of Sec. 40(a)(i)(ia) of the Act. Accordingly, the assessing officer disallowed payments made to Mr. Whitehead. Aggrieved, the assessee company filed appeal before CIT(A).
4. The CIT(A) after considering the submission of the assessee noted the following services outlined in para-3 of the agreement dated 30-01-2003:-
"i) Advice on marketing, distribution and sales strategies for increasing sales and turnover.
ii) Advice on manufacturing process.ITA No.3928/Ahd/2007 A.Y. 2004-05
Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 3
iii) Advice on raw material use, sources of the same, pricing and terms of supply.
iv) Advice on identification of potential markets for abrasive products including new application.
v) Facilitate formation for long term strategic alliances with prestigious customers.
vi) Provide information regarding any developments in abrasives industry."
In view of the above services, the CIT(A) gone into facts that the Assessing Officer noted, whether it is long term strategic alliances, potential markets identified, pricing, terms of supply and sources of raw material, changes in manufacturing processes or strategies for marketing, distribution and sales are all of a nature which are still available to the assessee-company for future use on a reasonably permanent basis. He further hold that it is clear that the payment made for fees in respect of technical services directly comes under the preview of Double Taxation Avoidance Agreement (DTAA in short) Article 13 Clouse 4©. He further noted that the assessee-company engaged Mr. Whitehead continuously does not in any way change of the services rendered or the fact that the services rendered or the fact that the services were of mature the benefit of which were available to the assessee-company for future use on a reasonably permanent basis. This fact was clearly brought out to the assessee in the show cause dated 03-11-2006. It is once again reiterated that the assessee having once formulated sales strategy as per experience of Mr. Whitehead had the same available with the assessee-company on a reasonably permanent basis. The contention of the assessee-company that it had not rendered services similar to the services for which Mr. Whitehead was engaged it does not come within the purview of DTAA unfounded. But in the case of assessee-company after the services were rendered by Mr. Whitehead if not only had the benefit of using the knowledge of potential market, potential source of raw materials, sales strategy, manufacturing process and long term alliances on a reasonably permanent basis. The CIT(A) further confirmed the addition by giving following finding in para-2.4 of his appellate order:-
"2.4 The appellant's contention that it is covered under Article 15 of DTAA is not acceptable. Further, after the amendment to Sec. 9, there is no requirement that the services should be rendered id India. The technical services rendered were made available in India and the appellant is the ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 4 beneficial owner of the same and hence the payment made for technical services comes under Section 40(a)(i)(ia) of the Act. The appellant was, therefore, required to deduct the TDS, which was not done. Hence, the AO was justified in making disallowance in respect of payment made to Mr. Whitehead. This ground is hereby rejected."
5. Before us the Ld. counsel for the assessee, Shri S.N. Soparkar argued that Section 90 of the Act specifically gives an option to an assessee to adopt provisions of the Act or DTAA to the extent the same are more beneficial to him. According to him, Mr. Whitehead adopted the provisions of DTAA if there is no permanent establishment in India, which is an admitted position and provisions of DTAA are attracted only if the payment made to him are royalties or fees for Technical Services (FTS). According to Ld. counsel, the nature of payment is not covered under the provisions of Section 40(a)(i)(ia) of the Act and further for provisions of DTAA to be applicable, the important word is 'beneficial owner' and the assessee is not beneficial owner of the services rendered by Mr. Whitehead and also the technical services has to be made available to the assessee, but this was not the case. Hence, the provisions of this Section are not attracted and in fact, the nature of payment is covered under Article 15 of the DTAA. Further, Mr. Whitehead did not stay in India for more than 90 days and therefore he cannot be taxed in India and no TDS is to be deducted. It was also submitted by Ld. counsel for the assessee that as per the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harina Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 (SC), in order to tax technical services in India, it is necessary that the services provided by non-resident assessee under a contract should not only be utilized within India but should also be rendered in India. Although there has been amendment in Section 9 with retrospective effect, the word 'rendered in India' has been deleted, but at that time, it was not in real sense that the assessee was not required to deduct the tax.
6. The Ld. counsel, Shri Soparkar further stated that in view of amendment by the Finance Act, 2007 w.r.e.f. 1-6-1976, the insertion of explanation to Sec. 9 (2) of the Act., it is impossible to deduct tax in the financial year 1-4-2003 to 31-3-2004, when this provision was not on statute book and this was brought retrospectively. It is well settled, that a person cannot be expected to do an impossible act, nor does law oblige him to do so. This argument was canvassed by the Ld. counsel on the ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 5 basis of a legal Maxim Lex Non Cogit ad impossiblia, meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform.
7. On the other hand, the SR-DR heavily relied on the orders of lower authorities addition stated that this obligation is caste on the assessee by the Legislature by amending the Act as noted above. In view of this, he stated that the orders of lower authorities be uphold.
8. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that by amendment in the Finance Act, 2007, the Legislature inserted the explanation retrospectively w.r.e.f.1-6-1976 to Sec. 9 (2) of the Act, whereas the assessment year involved is 2004-05 relevant to previous year 2003-04 and it is impossible for the assessee to deduct tax in the financial year 1-4-2003 to 31-3-2004, when the obligation to deduct TDS was not on the assessee during that period. The provision of Section 9 provides for situations where income is deemed to accrue or arise in India to a non-resident. We find that the Legislature Vide Finance Act, 1976, a source rule was provided in section 9 through insertion of clauses, (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively and the intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India but the Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. According to the Legislature this interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India and therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 6 non-resident has a residence or place of business or business connection in India. Even after that, the Hon'blw Karnataka High Court, in a recent judgment in the case of Jindal Thermal Power Company Ltd. v. Deputy CIT (TDS) [2010] 321 ITR 31 has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme! Court in its judgement in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the Explanation. Further the Legislature vide Finance Bill, 2010 in order to remove any doubt about the legislative intent of the aforesaid source rule, substituted in place of the existing Explanation a new Explanation to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be. included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.
This amendment was made retrospectively from 1st June, 1976 and will accordingly, apply in relation to the assessment year 1977-78 and subsequent years.
9. In view of the above facts and legal position, whether the assessee can be asked to do impossible Act i.e. to deduct tax for the past period. With the insertion of the explanation retrospectively by the Finance Act, 2007 w.r.e.f.1-6-1976 to Sec. 9 (2) of the Act, whereas the assessment year involved is 2004-05 relevant to previous year 2003-04, it is impossible for the assessee to deduct tax in the financial year 1-4- 2003 to 31-3-2004, when the obligation to deduct TDS was not on the assessee during that period. The argument canvassed by the Ld. counsel on the basis of a legal Maxim lex non cogit ad impossiblia, meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform. This Maxim is accepted by different courts of this country, including the Hon'ble Supreme Court in the case of Krishnaswamy S. PD. And Another .V. Union of India and ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 7 Others (2006) 281 ITR 305 (SC) made the following observations in relation to the provisions of chapter XX-C of the Act.
The maximum of equity, namely, actus curiae neminem gravabit - an act of court shall prejudice no man, is founded upon justice and good sense which serves a safe and certain guide for the administration of law. The other relevant maxim is, lex non cogit ad impossibilia - the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases.(see U.P.S.R.T.C. v Imtiaz Hussain [2006] 1 SCC 380, Shaikh Salim Haji Abdul Khagumsab v. Kumar [2006] 1 SCC 46, Mohammad Gazi v. State of MP [2000] 4 SCC 342 and Gursharan Singh v. New Delhi Municipal Committee [1996] 2 SCC 459."
Similarly, while dealing with a question as to whether an assessee can be penalized for failure to carry out an act prior to its incorporation the apex court in the case of Life Insurance Corp Ltd. v. CIT (1996) 219 ITR 410 made following observations
11. It is obvious that in the surplus or deficit in any inter-valuation period relating to the Corporation which came to be formed only on the appointed day in 1956, this amount could not be reflected since it related to a period prior to the formation of the Corporation. The law does not contemplate or require the performance of an impossible act - Lex non cogit ad impossibilia. It is now to be seen whether the expression "included therein" in rule 2(l)(b) is alone sufficient to negative the logical legal effect of section 7 of the LIC Act."
While dealing with question as to whether an assessee can be liable to pay interest for failure to pay advance tax during the year when the liability to pay tax had arisen on account of amendment to law which took place after the end of the year, Hon'ble Madras High Court in the case of CIT V. Revathi Equipment Ltd. (2008) 298 ITR 67 (Mad), reproduced and thereafter approved the reasoning contained in the following passage of the Tribunal order.
"We have no doubt in our mind that the levy of interest under sections 234B and 234C are of mandatory nature, but at the same time, if we read sections 234B and 234C carefully, we find that such liability is fastened to those assessees who are liable to pay advance tax. Now, let us see who are liable to pay advance tax and how. Sections 207 and 208 read as under:
'207. Tax shall be payable in advance during any financial year, in accordance with the provisions of sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income being hereafter in this Chapter referred to as "current income".ITA No.3928/Ahd/2007 A.Y. 2004-05
Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 8
208. Advance tax shall be payable during a financial year in every ;-
:
;Aj../;. case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this Chapter, is five thousand rupees or more.'
7. A combined reading of the above provisions makes it clear that the assessee has to pay taxes in advance in respect of the total income of the assessee, which would be chargeable in a particular assessment year. Now before the introduction of section 35DDA, the legal dictum was very clear that the assessee could claim expenditure incurred on account of payment made for the VRS by the assessee in view of the binding decisions of the hon'ble jurisdictional High Court in the case ofCITv. George Oakes Ltd. [1992] 197 ITR 288 (Mad) and CIT v. Simpson and Co. Ltd. (No. 2) [1998] 230 ITR 794 (Mad). In both the decisions, it was clearly laid down by the hon'ble jurisdictional High Court that payments to employees under the VRS were in the nature of business expenditure and was deductible under section 37.
Therefore, till the introduction of new provisions under section 35DDA, the assessee could have estimated the income legitimately after reducing the expenditure incurred on the VRS. It is a common knowledge that the Finance Bill is introduced on February 28, 2001, and the same is made into the Act after passing the Bill in both the Houses of Parliament and receiving the assent of the hon'ble President of India some where in May or June, which means till that date no assessee can visualize that a new liability would be fastened to him. Normally, new provisions are introduced with effect from the next assessment year, but this provision under section 35DDA was introduced by Parliament in its wisdom with effect from April 1, 2001, i.e., the same year and that is why difficulty has arisen for visualizing the liability and the assessee could not deduct such expenditure. In fact in almost identical circumstances in the Third Member decision by the Delhi Bench in the case of Haryana Warehousing Corporation v. Deputy CIT [2001] 252 ITR (AT) 34 it was held that in such situations the legal dictum ad impossibillia would be attracted. The simple meaning of this dictum is that 'law cannot compel you to do the impossible'. In the case before us also, the assessee could not have visualized till the last installment of advance tax, i.e., March 15, 2001, that it would not be entitled to deduct the VRS payments. Therefore, the assessee could not have done anything other than to estimate the liability to pay advance tax on the basis of existing provisions. We are of the considered opinion that in such situation, it cannot be said that the assessee was liable to pay advance tax. Once we come to the conclusion that the assessee was not liable to pay advance tax, there is no question of charging tax under sections 234B and 234C. In similar circumstances in the case of Priyanka Overseas Ltd. v. Deputy CIT [2001] 79 ITD 353 (Delhi) where the assessee had treated the receipt of cash assistance as capital receipts, which was subsequently amended to be business receipt by the Finance Act, 1990, it was held that in such cases interest under sections 234B and 234C was not chargeable. In these circumstances, we think that the assessee was not liable to pay advance tax and therefore levy of interest under sections 234B and 234C is not justified. Further, it is pertinent to note that the assessee by way of abundant caution deposited a sum of Rs. 90,00,000 on August 6, 2001, i.e., ITA No.3928/Ahd/2007 A.Y. 2004-05 Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 9 much before the due date of filing of the return, which also proves the bona fide credentials of the assessee. In these circumstances, we set aside the order of the learned Commissioner of Income-tax (Appeals) and delete the levy of interest under sections 234B and 234C. "
10. While dealing with the question as to whether an assessee can be faulted for not declaring the amount of capital gain on acquisition of land, when the amount of compensation itself is not determined Hon'ble Allahabad High Court in the case CIT. V. Premkumar (2008) 214 CTR 452 (All) held as follows.
"'Lex Non Cogit ad impossibilia' is an age old maxim meaning that the law does not compel a man to do which he cannot possibly perform. Requiring the assessee to file a proper and complete return by including the income under the head 'Capital gain' would be impossible for the assessee, in cases of the nature referred above."
In the case of VLS Finance Ltd And Another v CIT And Another (2007) 289 ITR 286 (Del) Hon''ble Delhi High Court was concerned with the question as to whether assessment proceedings were within the period of limitation in view of the fact that special audit, which was to precede the assessment order was stayed, for some time by the order of the court. In this connection, the court noted as follows.
"In Raj Kumar Dey v. Tarapada Dey AIR 1987 SC 2195, the Supreme Court examined the scope of a stay order on calculation of time/limitation. In this case, an award could not be registered within the time stipulated by the Registration Act owing to an interim injunction and an order directing the award to be deposited in Court. The Supreme Court allowed the entire period during which the stay order was in operation to be excluded while applying the maxim lex non cogit ad impossibilia or the law. does not compel a man to do that which he cannot possibly perform."
In the case of Escorts Ltd. v. CIT (2002) 257 ITR 468 (Del), Hon'ble Delhi High Court was concerned with claim of an assessee for grant of refund under section 244 of the Act, which was denied to an assessee by the revenue on the ground that the assessee himself was responsible for delay of refund, and therefore cannot claim the amount of interest. While considering the rights of the assessee to claim interest, the Delhi High Court held as follows 'Lex non cogit ad impossibilia' is a well-known maxim. It means the law does not compel a man to do that which he cannot possibly perform. If the Assessing Officer could not perform his duties to complete the order of assessment in the absence of any evidence furnished by the assessee, the Department cannot be blamed therefore.
ITA No.3928/Ahd/2007 A.Y. 2004-05Sterling Abrasive Ltd. v. ACIT, Cir-8, A'bd Page 10 A law cannot be interpreted in vacuum. It has to be interpreted having regard to the facts and circumstances involved in each case."
11. We find from the above legal position and facts of the case that the assessee acted bona fide in conformity with the provision of act and the legal position as enumerated by Hon'ble apex court in the case of Ishikawajma-Harina Heavy Industries Ltd. (supra). At the relevant point of time it was impossible on the part of the assessee to deduct tax on the income of non-resident. Admittedly, up to the insertion of explanation vide Finance Act, 2007, the assessee was under bona fide belief not to deduct tax and accordingly he acted as per law. Accordingly we allow the appeal of assessee.
12. In the result, assessee's appeal is allowed.
Order pronounced in Open Court on 02/07/2010
Sd/- Sd/-
(N.S.Saini) (Mahavir Singh)
Accountant Member Judicial Member
Ahmedabad,
Dated :02/07/2010
*Dkp
Copy of the Order forwarded to :
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-XIV, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad