Section 40(a)(ia) of the income tax Act, 1961 — Business Disallowance — In terms of Section 90(2), it is open to an assessee to adopt either the DTAA or the Act as is beneficial to it and the Revenue having accepted that the service providers during the relevant period, did not receive any income in view of the DTAA, the occasion to deduct tax at source would not arise, therefore, dis-allowance under Section 40(a)(i) will also not arise.[2019] 52 ITCD 93 (BOM)
Facts: Being aggrieved of the order of Tribunal, revenue went on appeal before High Court and raised the question of law that (i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the dis-allowance u/s 40(a)(ia) of the I.T. Act, 1961 cannot be made in respect of the payment of professional fees outside India without realizing that the tax was required to be deducted on these payments u/s 195 of the Income Tax Act, 1961?
(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the requirement of ‘rendering of services’ in India was done away with by the insertion of an Explanation by the Finance Act, 2010, with retrospective effect without appreciating that the said explanation was merely clarificatory in nature and as such the tax was supposed to be deducted on receipts taxable in India even if the services were rendered outside India?
Held, that from the questions proposed by the Revenue, it is clear that there is no challenge by them to the findings of the Tribunal that the payments made by the assessee to its service providers is covered by the DTAA. There is no challenge to the applicability of DTAA in favour of the assessee. In fact, the only challenge is the question urged, as reiterated by the Revenue also at the hearing. In these circumstances, the findings of the Tribunal that the payments made to the service providers are not subject to tax in India in view of the DTAA, is not a subject of challenge by the Revenue as it does not seem to be aggrieved by it. Thus, the issue stands covered in favour of the assessee in the absence of challenge by the Revenue. In terms of Section 90(2), it is open to an assessee to adopt either the DTAA or the Act as is beneficial to it. The Revenue having accepted that the service providers during the relevant period, did not receive any income in view of the DTAA, the occasion to deduct tax at source would not arise. Therefore, dis-allowance under Section 40(a)(i) of the Act will also not arise. In the above view, the question no.(i) as proposed by the Revenue is academic in these facts as the application of DTAA which results in no income arising for the service providers in India is a concluded issue. Therefore, the occasion to examine Section 195 in these facts would not arise. So also, question (ii) as proposed is academic as no occasion to deduct tax at source would arise in the absence of any income in the hands of the service providers outside India in view of Section 195. Even otherwise a retrospective amendment cannot cast an obligation to deduct tax when not in force at the relevant time i.e. when payment was made. In fact, this Court in Commissioner of Income Tax Vs. M/s. NGC Networks (India) Pvt. Ltd. (Income Tax Appeal No.397 of 2005, decided on 29th January, 2018) has held that a party cannot be called upon to perform an impossible act i.e. to comply with the provision which was not in force at the relevant time. Admittedly, the Explanation if applicable is introduced later by a retrospective amendment. Thus, there could be no obligation to deduct tax at source when the payments have been made to the service providers abroad in the absence of a specific provision at the time when the payments were made. In view of the above facts, the questions as proposed by the Revenue are academic, as the basis of the Tribunal’s order that the amounts paid to the service providers is not income taxable in India in terms of DTAA. This is not being challenged by the Revenue in the present proceedings.