Case Law Details
Dis allowance U/s. 40(a)(i) cannot be made in a situation in which tax ability is confirmed only as a result of retrospective amendment of law
Issue – Dis allowance of Rs 52,07,883, in respect of leather testing charges paid to TUV Product Und Umwelt GmbH – a tax resident of Germany, under section 40(a)(i) of the Act, on the ground that the assessee failed to discharge his tax withholding obligations in respect of the same.
In our considered view, the provisions of Section 40(a)(i) cannot be interpretated in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year, because, apart from the difference in wording of Section 40(a)(i) vis-a-vis Section 40(a)(ia) and other factors, such an interpretation will make the section redundant and it is one of the fundamental principles of interpretation is to interpret is ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant, and to understand the words with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. It is also an elementary legal principle, as was also held by Hon’ble Bombay High Court in the case of CIT Vs Sudhir Jayantilal Mulji (214 ITR 154) that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein.31. Learned counsel also submits in any event, it is because of a retrospective amendment in law . It is submitted that the retrospective amendment was brought about by the Finance Act 2010 which was nowhere in sight at the material point of time, i.e. previous year relevant to the assessment year 2008- 09. Learned counsel submits that the assessee cannot be penalized for performing the impossible task of deducting tax at source in accordance with the law which was brought on the statute book much after the point of time when tax deduction obligations were to be discharged. Our attention is invited to the decisions of a coordinate bench in the case of Channel Guide India Ltd Vs ACIT (139 ITD 49), wherein, following the views expressed by Ahmedabad bench in the case of Sterling Abrasives Ltd Vs ITO (ITA No. 2234 and 2244/Ahd/2008; order dated 2008), it is held that law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the dis allowance under section 40(a)(i) cannot be made in a situation in which tax ability is confirmed only as a result of retrospective amendment of law. Learned counsel has also cited several other decisions in support of the proposition that in the case of retrospective amendment, the assessee cannot be punished for not complying with the law as it did not exist at the material point of time.
INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA
[Coram : Bhavnesh Saini JM and Pramod Kumar AM]
I.T.A. No.: 393/Agra/2012 Assessment year: 2008-09
Metro & Metro
Vs.
Additional Commissioner of Income Tax
Date of pronouncing the order : November 01, 2013
ORDER
Per Pramod Kumar:
1. By way of this appeal, the assessee appellant has challenged the correctness of learned Commissioner (Appeals)’s order dated 29th February 2012, in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( hereinafter referred to as ‘the Act’) for the assessment year 2008-09.
Article 12
ROYALTIES AND FEES FOR TECHNICAL SERVICES
(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.
(3) The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematography films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
(4) The term “fees for technical services” as used in this Article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement.
(5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
(6) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a Land or a political subdivision, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
(7) Where, by reason of special relationship between the payer and the beneficial owner or between both of them and some other Person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
9. A plain reading of the above provisions show that under the Indo German tax treaty, a source state has the rights to tax an income in the nature of ‘royalties’ and ‘ fees for technical services’, as defined above, but the tax so levied, by the virtue of taxing rights allocated above, shall not exceed ten percent. In effect, therefore, when a source state taxes the said income at ten percent rate or less, the said levy is in accordance with the scheme of allocation of taxing rights. However, when taxes levied exceed the specified rate, the extent to which such taxes exceed the specified rate, it will be contrary to the scheme of the allocation of taxing rights under the treaty and the tax ability will be restricted in terms of the limited rights so allocated to the source state.
10. In all fairness to the learned counsel, however, we are alive to the fact that a coordinate bench of this Tribunal, in the case of Pooja Bhatt Vs DCIT (2008 TIOL 558 ITAT MUM), had indeed drawn a line of demarcation between ‘shall ‘, ‘may’ and ‘may also’ and, based on that analysis, held that an income cannot be taxed in the residence country unless it falls in the category where both the contracting states have the right to tax, which, in their esteemed view, will be represented by expression “may also”. However, the question that we are called upon to adjudicate in this case did not fall for consideration in the said case, and as is the settled position of law, a judicial precedent is an authority for what it actually decides and not what may even reasonable follow from the same. We leave it at that.11. In view of the above discussions, in our considered view, the TUV GmbH does not get any benefit from the provisions of the Indo German tax treaty, so far as taxability of its income from leather testing fees is concerned.12. Coming to the merits of tax ability of testing fees in the hands of TUV GmbH under section 9(1)(vii), we find that, in principle, the issue is covered against the assessee by decision of a coordinate bench, in the case of Ashapura Mini chem (supra) wherein a coordinate bench, speaking through one of us (i.e. the Accountant Member), had observed as follows:
9. The legal proposition canvassed by the learned counsel, however, does no longer hold good in view of retrospective amendment w.e.f. 1st June 1976 in section 9 brought out by the Finance Act, 2010. Under the amended Explanation to Section 9(1), as it exists on the statute now, it is specifically stated that the income of the non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of section 9(1), 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. It is thus no longer necessary that, in order to attract tax ability in India, the services must also be rendered in India. As the law stands now, utilization of these services in India is enough to attract its tax ability in India. To that effect, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its tax ability in India.
14. As far as Hon’ble Supreme Court’s judgment in the case of GVK Industries is concerned, it does not, by any stretch of logic, hold against the constitutional validity of Section 9(1)(vii). The relevant observations made against the constitutional validity of laws having extra territorial implications are as follows:(2) Does the Parliament have the powers to legislate ‘for’ any territory other than the territory of India or any part of it ?The answer to the above would be ‘no’. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or maybe expected to do so, within the territory of India and also with respect to extra-territorial aspects or causes that have an impact or nexus with India……Such laws would fall within the meaning, purport and ambit of grant of powers of Parliament to make laws “for the whole or any part of the territory of India” and they may not be invalidated on the ground that they require extra territorial operation. Any laws enacted by
the Parliament with respect to extra territorial aspects or causes that have no nexus with India would be ultra vires and would be laws made for a foreign territory.
15. A plain reading of the above observations by Their Lordships clearly indicates that as long as the law enacted by the Parliament has a nexus with India, even if such laws require extra territorial operation, the laws so enacted cannot be said to constitutionally invalid. It is only when the “laws enacted by the Parliament with respect to extra territorial aspects or causes that have no nexus with India” that such laws “would be ultra vires”. As to what is acceptable nexus, we find guidance from Prof Michael Lang’s rather recent book ‘Introduction to the Law of Double Taxation Conventions’ ( published by Linde, Austria; ISBN 9 78-90-8722-082-2):In international law practice, there are no significant limits on the tax sovereignty of states. In designing the domestic personal tax law, the national legislator can even tax situations when, for example, only a “genuine link” exists. It is only when neither the person nor the transaction has any connection with the taxing state that tax cannot be levied.
16. There is a clear nexus between the taxability of services rendered to residents of a tax jurisdiction with that jurisdiction itself. As the assessee himself has observed in the written submissions reproduced in the assessment order at page 6 thereof, “the intention of introducing the source rule was to bring to tax interest, royalty or fees for technical services by way of creating a fiction in Section 9, the source rule would mean that irrespective of the situs of services, the situs of taxpayer and the situs of utilization of services will determine the tax jurisdiction”. This source rule taxability has not been struck down by the GVK decision. All it says that there has to be reasonable nexus and impact. It is not, and cannot be, anybody’s case that there is no nexus between income in the hands of a person providing technical services to India and India the tax jurisdiction. We, therefore, reject learned counsel’s reliance on GVK decision.
18. While we are inclined to agree with the broad principles canvassed by the learned counsel, we donot think these principles lead to the conclusions he is seeking to justify. It is, if we may say so, classical case of right propositions being used to justify the wrong conclusions.19. We agree that when no human intervention is involved in any services, such services cannot be treated to be of the nature which can be covered by the scope of Section 9 (1)(vii). The detailed reasoning for this approach, as was noted by another coordinate bench in the case of ITO Vs Right Florists Pvt Ltd (154 TTJ 142), is as follows:
24. While there is no specific definition assigned to the technical services, and Explanation 2 to Section 9(1)(vii), as also Article 12(2)(b) merely states that ‘fees for technical services’ will include considering of “rendering of any managerial, technical or consultancy services”.It is significant that the expression ‘technical’ appears along with expression ‘managerial’ and ‘consultancy’ and all the three words refer to various types of services, consideration for which is included in the scope of ‘fees for technical services’. The significance of this company of words lies in the fact that, as observed by a coordinate bench of this Tribunal in the case of Kotak Securities Ltd Vs DCIT (50 SOT 158), “when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colors from each other, the meaning of more general being restricted to a sense analogous to that of less general”. Just as a man is known by the company he keeps ,a word is also to be interpreted with reference to be accompanying words. Words derive colour from the surrounding words. Broom’s Legal Maxims (10th Edn.) observes that “It is a rule laid down by Lord Bacon, that copulation verbo rum indicate cceptationem in eodem sensu i.e. the coupling of words together shows that they are to be understood in the same sense. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take color from each other and restrict its meaning to the genus of these words. In this way, the meaning of words is restricted because of other words in the same group of words, and the meaning is so restricted to the species or genus of those other words. Genus of these words should be clearly discernible from the lowest common factor in those words. The lowest common factor in ‘managerial, technical and consultancy services’ seems to be the human intervention, because while these three words are of wide scope and are in varied field, the only common thread in these words seems to be that the services, which are essentially professional services in nature, can be rendered with human interface. A managerial or consultancy service can only be rendered with human interface, while a technical service can be rendered with human interface as also without human interface. A technical service, for example, could be automated analysis of a chemical compound without any scope of any human contribution at any stage, and a technical service could also be physical examination by an expert chemical analyst, with or without the help of machines, of the same chemical compound. However, when we try to restrict the meaning of technical services to the services which are covered by managerial and technical services as well, services without human interface will have to be taken out of its ambit. It is, therefore, clear on principle that as long as words are used together in a statutory provision, they take color from each other and restrict its meaning to the genus of these words which is evident by the lowest common factor in those words. The lowest common factor in ‘managerial, technical and consultancy services’ being the human intervention, as long as there is no human intervention in a technical service, it cannot be treated as a technical service under Section 9(1)(vii). There is one more approach to this issue, even though the results will be the same. The other way of looking at these three words on the basis of the principle of noscitur a sociis is, as was done by Hon’ble Delhi High Court in the case of CIT Vs Bharti Cellular Limited (319 ITR 139), is that the common characteristic of the majority of the words be read as limitation on the scope of the other words. While doing so, Their Lordships had observed as follows:
13. In the said Explanation [ i.e. Explanation 2 to Section 9(1)(vii)] the expression fees for technical services means any consideration for rendering of any managerial, technical or consultancy services. The word technical is preceded by the word managerial and succeeded by the word consultancy. Since the expression technical services is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable.
The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:-
Where two or more words which are susceptible of analogous meaning are coupled together,noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.
This would mean that the word technical would take colour from the words managerial and consultancy, between which it is sandwiched.
The word managerial has been defined in the Shorter Oxford English Dictionary, Fifth Edition as:- of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc.
The word manager has been defined, inter alia, as:- a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization etc; a person controlling the activities of a person or team in sports, entertainment, etc.
It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression manager and consequently managerial service has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.
14. Similarly, the word consultancy has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. Consultant itself has been defined, inter alia, as a person who gives professional advice or services in a specialized field. It is obvious that the word consultant is a derivative of the word consult which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.
15.From the above discussion, it is apparent that both the words managerial and consultancy involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element.
25. We may also point out that while this judgment did not meet approval of Hon’ble Supreme Court, in the judgment reported as CIT Vs Bharti Cellular Limited (330 ITR 239), on the short factual aspect regarding fact of human intervention. It was for recording the factual findings on this aspect that the matter was remitted to the file of the Assessing Officer. However, so far as the principle laid down by Hon’ble Delhi High Court on the application of principle of noscitur a sociis in restricting the scope of ‘technical services’ to ‘technical services with a human interface’ was concerned, Their Lordships of Hon’ble Supreme Court took note of the said principle and left it intact. The stand taken by Hon’ble Delhi Court, in our humble understanding, stands approved. Of course, what constitutes a technical service without human interface is essentially a question of fact and each case will have to be examined on its own facts. However, as long as there is no human intervention in a technical service, in the light of law so laid down, it cannot be treated as a technical service under Section 9(1)(vii).
20. The principle of law, as clearly discernable from the observations made by Hon’ble Delhi High Court in Bharati Cellular’s case (supra), is that “the word technical as appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element.” In other words, when services have no human element involved, such services cannot be treated as ‘technical services’ for the purposes of Section 9(1)(vii). Let us also not forget that these observations were made in the context of inter connect and port access facility which is facility to use the gateway and the network of other cellular operator. This is a completely automated process with no human involvement at all, and yet , when the matter reached Hon’ble Supreme Court, Their Lordships, in the judgment reported as CIT Vs Bharati Cellular Ltd ( 330 ITR 239), did remit the matter back to the Assessing Officer by observing as follows:
The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the “capacity” of each service provider fixed when Interconnect Agreements are arrived at?
For example, we are informed that each service provider is allotted a certain “capacity”. On what basis such “capacity” is allotted and what happens if a situation arises where a service provider’s “allotted capacity” gets exhausted and it wants, on an urgent basis, “additional capacity”?
Whether at that stage, any human intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasize that these types of matters cannot be decided without any technical assistance available on record.
There is one more aspect that requires to be gone into. It is the contention of Respondent No.1 herein that Interconnect Agreement between, let us say, M/s. Bharti Cellular Limited and BSNL in these cases is based on obligations and counter obligations, which is called a “revenue sharing contract”. According to Respondent No.1, Section 194J of the Act is not attracted in the case of “revenue sharing contract”. According to Respondent No.1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute “fees” under Section 1 94J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal.
In short, the above aspects need reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinational Corporations, we are of the view that the cases herein are required to be remitted to the Assessing Officer (TDS).
Accordingly, we are directing the Assessing Officer (TDS) in each of these cases to examine a technical expert from the side of the Department and to decide the matter within a period of four months. Such expert(s) will be examined (including cross-examined) within a period of four weeks from the date of receipt of the order of this Court. Liberty is also given to Respondent No.1 to examine its expert and to adduce any other evidence.
21. In Siemens case (supra), however, the coordinate bench went much beyond what was held by the Hon’ble Courts above. The coordinate bench has concluded that, “Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that .. (the assessee) is rendering any kind of technical services to assessee” . These observations are not only based on erroneous analysis of the legal position but directly contrary to the law laid down by Hon’ble Supreme Court wherein it is held that even in a case of completely automated process like interconnect and port access facility, which is facility to use the gateway and the network of other cellular operator, the Assessing Officer is still required to examine “whether at any stage, any human intervention is involved”. It is not a question of more of, or less of, human involvement. It is, in our humble understanding, the question of presence of or absence of human involvement. Our distinguished colleagues clearly erred in reading the unambiguous mandate of law laid down by Hon’ble Courts above. However, even as we disagree with the coordinate bench decision, for the reasons we will set out in a short while, we see no need to remit the matter to the larger bench. That would be, as we will see a little later, an academic exercise on the facts of the present case. Suffice to say, we are not inclined to accept this plea of the assessee. In any event, there is nothing on records to even demonstrate the precise process of leather testing, the actual steps involved in the process and parameters involved, nor these aspects of the matter have been examined by any of the authorities below.
23. Learned counsel’s next argument is that since assessee is one hundred percent exporter, we have to proceed on the basis that the source of assessee’s income, for which testing services are used, is outside India, and, accordingly, by the virtue of exception visualized in Section 9(1)(vii)(b), the fees for technical services paid to TUV GmbH will not be taxable in India.24. In order to deal with this plea, let us take a fresh look at Section 9 (1)(vii) first:
Section 9 (1) (vii)
The following income shall be deemed to accrue or arise in India
(vii) income by way of fees for technical services payable by—
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:]
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]
[Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]
Explanation[2] : For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
25. Section 9(1)(vii)(b) makes it clear that the exception in respect of tax ability of fees for technical services paid by an Indian resident is that when such fees is paid in respect of “ services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India”. This exception thus has two distinct segments- first, in respect of services utilized in a business or profession carried on by Indian resident outside India, and – second, in respect of services utilized in respect of earning any income from a source outside India. No doubt whether an India based business is one hundred percent export oriented unit or not, it is still a business carried on in India, and it cannot, therefore, be covered by the first limb of exception envisaged in Section 9(1)(vii)(b). Even if entire products are sold outside India, the fact of such export sales by itself does not make business having been carried outside India. What matters really, in this perspective, is whether or not business is carried on in India or not, and once it is an undisputed position that business is set up and carried on India, irrespective of where the end consumers are, the business is carried on outside India. However, the scope of second limb of this exception is rather narrow. As against use of expression ‘profession or business carried on …….outside India’, this exception refers to use of service in ‘making or earning any income from any source outside India’. In order to be covered by this exception, what is material is that, irrespective of where the business is situated, the services need to be used for earning or making income from any source outside India. A business outside India and a source outside India are used together in contrast, and can be viewed as reflecting relatively active and passive activities. For example, if technical service is used in a business activity outside India, it could be covered by the first category, while technical service used in an asset which gave on lease could be in the second category. The question, however, is whether the customers being outside India could be viewed as source of income. In our considered view, the source of income, whether customers are inside India or outside India, continues to be business in India. A customer is an important part of the business but no matter how important a segment of business is, such a part of the business cannot be the business itself. The assessee has all along claimed that the leather testing services were required under instructions from importers and so as to enable its products to enter the German markets. All it indicates is that the services were required because of the foreign importers, but, as the mandate of the law, is that aspect itself is not decisive and sufficient for the purpose of exclusion from the scope of Section 9(1) (vii). The services should be for the purpose of earning an income from a source outside India. A customer is not the source of income, he is an important part of the business, which, in turn, is the source of income. As regards the decision of coordinate bench in Havel’s case, that was a case in which not only the customers but also certain manufacturing facilities were outside India. We agree that once the manufacturing facilities are outside India and the customers are also outside India, such a situation will indeed be covered by the exception visualized in Section 9(1) (vii) (b).
26. Learned counsel’s argument that the factual plea of the asses see that the business source was outside India has not been rejected by the authorities below, and should, as such, be taken as correct, does not impress us at all. That will be too superficial an approach for a judicial forum which is a final fact finding forum as well.
30. We are unable to accept this plea. There is no dispute that the Special Bench decision is in the context of Section 40(a)(ia) which is of recent origin and the majority view therein heavily relied upon the wordings originally proposed in the enactment of Section 40(a)(ia) which were in sharp contrast with the wordings actually used in the enactment of Section 40(a)(ia), as also certain other issues which do not touch upon the scope Section 40(a)(i). Section 40(a)(i) debars the deduction of “any interest , royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII- B” In contrast with these words, Section 40 (a) (ia) used the expression “payable to a resident”. Obviously, the scope of setting of the words ‘payable’ in these two situations is materially different and there can indeed be a school of thought, howsoever detached from the reality as it may be, that amount payable to a resident, in the context of Section 40(a)(ia), reflects amount remaining payable. We are not concerned with that aspect of the matter nor do we need to deal with the same. Suffice to say that what is decided in the context of Section 40(a)(ia) does not apply to Section 40(a)(i) and the assessee thus does not derive any advantage from the decisions in the context of Section 40(a)(i). In our considered view, the provisions of Section 40(a)(i) cannot be interpretated in such a manner so as to restrict the scope of section to only amounts remaining payable at the end of the year, because, apart from the difference in wording of Section 40(a)(i) vis-a-vis Section 40(a)(ia) and other factors, such an interpretation will make the section redundant and it is one of the fundamental principles of interpretation is to interpret is ut res magis valeat quam pereat, i.e., in such a manner as to make it workable rather than redundant, and to understand the words with reference to the subject-matter, i.e., verba accopoenda sunt secundum subjectum materiam. It is also an elementary legal principle, as was also held by Hon’ble Bombay High Court in the case of CIT Vs Sudhir Jayantilal Mulji (214 ITR 154) that a judicial precedent is an authority for what it actually decides and not what may what come to follow from some observations made therein.31. Learned counsel also submits in any event, it is because of a retrospective amendment in law . It is submitted that the retrospective amendment was brought about by the Finance Act 2010 which was nowhere in sight at the material point of time, i.e. previous year relevant to the assessment year 2008- 09. Learned counsel submits that the assessee cannot be penalized for performing the impossible task of deducting tax at source in accordance with the law which was brought on the statute book much after the point of time when tax deduction obligations were to be discharged. Our attention is invited to the decisions of a coordinate bench in the case of Channel Guide India Ltd Vs ACIT (139 ITD 49), wherein, following the views expressed by Ahmedabad bench in the case of Sterling Abrasives Ltd Vs ITO (ITA No. 2234 and 2244/Ahd/2008; order dated 2008), it is held that law cannot cast the burden of performing the impossible task of performing tax withholding obligations with retrospective effect, and, accordingly, the dis allowance under section 40(a)(i) cannot be made in a situation in which tax ability is confirmed only as a result of retrospective amendment of law. Learned counsel has also cited several other decisions in support of the proposition that in the case of retrospective amendment, the assessee cannot be punished for not complying with the law as it did not exist at the material point of time.
35. In the result, the appeal is partly allowed in the terms indicated above.
Pronounced in the open court today on 1st day of November, 2013.