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5. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee has filed detailed written submissions on the issue which had been reproduced at Para 4.3.2 on pages 5 to 8 of ld.CIT(A) order. The sum and substance of argument of the assessee before the ld.CIT(A) are that payment made to a non-resident recipient is neither taxable under the Act as fees for technical services nor taxable under DTAA as business profits because payment made to non-resident for services rendered outside India is outside the scope of definition of FTS before amendment to Section 9(1)(vii) by the Finance Act, 2010 with retrospective effect from 01.06.1976. He, further submitted that DTAA between India and Mauritius is silent about taxation of FTS and once the DTAA does not provide for taxation of FTS, any payment made to non-resident shall come under Article 7(1), which deals with business profits. If you apply Article 7 of India-Mauritius DTAA then, the same is not taxable as business profits, because the non-resident does not have any permanent establishment in India. The ld.AR further referring to various decisions including decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, 288 ITR 408, when liability was fastened on the assessee on the basis of subsequent retrospective amendment of law then, on the basis of impossibility of performance to deduct TDS, disallowance cannot be made u/s.40(a)(i) for non-deduction of tax at source u/s.195 of the Act. The assessee has relied upon the following judicial precedents:

7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, the DTAA between India and Mauritius does not cover fees for technical services. It is also an admitted fact that if two provisions are considered between DTAA and Indian Income Tax laws, then provisions more beneficial to the assessee should be considered. If you go by the said rule, then payment made by the assessee to a non- resident entity for services rendered outside India should be considered in light of DTAA between India and Mauritius. As we have already stated earlier, 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 payment under Article 7 as business profits, we find that since non-resident does not have permanent establishment in India, same cannot be taxed as business profits.

8. Be that as it may. The issue before us is not taxability of payment made by the assessee to non-resident entity for services rendered outside India as fees for technical services or not in terms of section 9(1)(vii) of the Act. The issue before us is disallowance of sum paid to non-resident without TDS u/s 40(a)(i) of the Act. Admittedly, the AO has brought amended explanation 9(2) with retrospective effect from 1-4-1976 by the Finance Act, 2010 and held payment made by the assessee as FTS u/s 9(1)(vii) of the Act and further, for non TDS disallowed the same u/s 40(a)(i) of the Act. Therefore, to decide the issue, one has to understand the judgment of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, (supra. The Hon'ble Supreme court while deciding the issue of FTS has considered pre- amended provisions of section 9(1)(vii) and held that if any payment in the nature of FTS to be taxed in India, as per provisions of section 9(1)(vii) of the Act, then, both services rendered and services received to be in India. If services are rendered outside India, even such services are received in India then same cannot be brought to tax under Indian Income-Tax laws as per the judgment of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT. Although, 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 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. This view is supported by various decisions of Tribunal including decision of ITAT, Mumbai Bench in the case of Channel Guide India Ltd., vs. ACIT and the Ahmadabad Tribunal in the case of Sterling Abrasive Ltd., vs. ACIT and Agra Bench in the case of Metro & Metro vs. Addl.CIT, where the Tribunal by following the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd., vs. DIT, held that at the relevant point of time, it was impossible on the part of the assessee to deduct tax at source on income of non-resident and thus, on that basis no disallowance can be made towards payment made to a non- resident u/s.40(a)(i) of the Act.