ITAT held that that the payment made by the assessee to ICC amounting to Rs. 4.56 crore as `Rights fee’ is not in the nature of `Royalty’ or `Fees for technical services’ covered u/s 9(1)(vi) or 9(1(vii) of the Act and as such the assessee was not obliged to deduct tax at source on this payment. Ex consequenti, the provisions of section 40(a)(i) are not attracted.
Assessee specifically argued before the AO that there was no `Business connection’ of ICC in India. Such argument has been reproduced by the AO himself on page 25 of his order. Despite that, the AO chose to treat in the hands of ICC the payment by the assessee as `royalty’ or `fees for technical services’ covered u/s 9(1)(vi) or (vii) and not due to `business connection’ covered u/s 9(1)(i) of the Act. In view of these facts, we are unable to admit the submission advanced by the ld. DR that the payment be also considered as covered u/s 9(1)(i) of the Act. It goes without saying that a DR cannot improve the order of the AO. His duty is to defend the assessment order and not setting up a new case.
Disallowance u/s 40(a)(i) is made when the assessee fails to deduct tax at source etc. in terms of section 195 before making payment to a non-resident. This section, in turn, provides that no payment should be made to non-resident without deduction of tax at source which is chargeable to tax in his hands. Thus, chargeability of income to tax in the hands of a non-resident is a condition precedent. In other words, if such receipt is not chargeable to tax in the hands of the non-resident, there will be no liability on the part of the payer to withhold tax and consequently, there can be no question of disallowance u/s 40(a)(i). We have noted from Appendix 2 that the assessee was to pay `Rights fee’ to ICC even during the preceding year. Taking this factor into consideration, the ld. DR was directed to inform the Bench if the payment by the assessee to ICC during the instant year or in earlier years was subjected to tax in the hands of the latter. Despite allowing time, the ld. DR failed to point out if the amount in question has been subjected to tax in the assessment of ICC. Obligation to deduct tax at source u/s 195 in the hands of a payer is a natural consequence of chargeability to tax of the receipt in the hands of payee. Failure of the Revenue to bring on record any evidence of such payment having been subjected to tax in the hands of ICC also casts shadow on the liability of the assessee to deduct tax at source.
