Uday S. Jagtap 690-17-ITXA=.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 690 OF 2017 Commissioner of Income Tax-16 Appellant v/s. KPMG Respondent Mr. Suresh Kumar for appellant Mr. Arijit Chakravarty a/w Mr. Abhishek Tilak for respondent CORAM : M.S. SANKLECHA & NITIN JAMDAR, J.J. DATED : 24 th SEPTEMBER, 2019 P.C. 1. This appeal under Section 260A of Income Tax Act, 1961 (Act) challenges order dated 18th March, 2016 passed by Income Tax Appellate Tribunal (Tribunal). This appeal relates to Assessment Year 2008-09. 2. Revenue has urged following questions of law for our consideration :- (i) Whether on facts and in circumstances of case and in law, Tribunal was justified in holding that dis-allowance u/s 40(a)(ia) of I.T. Act, 1961 cannot be made in respect of payment of professional fees outside India without realizing that tax was required to be deducted on these payments u/s 195 of Income Tax Act, 1961? 1 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc (ii) Whether on facts and in circumstances of case and in law, Tribunal was justified in holding that requirement of rendering of services in India was done away with by insertion of Explanation by Finance Act, 2010, with retrospective effect without appreciating that said explanation was merely clarificatory in nature and as such tax was supposed to be deducted on receipts taxable on India even if services were rendered outside India? 3. respondent is engaged in business of rendering taxation business, advisory audit related services and other consultancy services. During previous year relevant to subject assessment year, respondent had paid fees for professional services outside India without TDS deduction to (1) Rahman Rahman Haq.,Bangladesh (2) KPMG Huazhen, China (3) KPMG, Mauritius (4)KPMG, Portugal (5) KPMG, Sweden (6) KPMG, Accounts N.V. Netherlands (7) Background Bureau Inc. USA (8) Sidney Austin LLP, USA (9) Scherzer International, USA (10) Conference Board Inc. USA (11) KPMG IFRG Ltd. UK (12) KPMG, LLP, USA (13) KPMG USCMG Ltd. UK and (14) KPMG International, Netherlands ( service providers for short). 4. During course of assessment proceedings for subject 2 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc assessment year, Assessing Officer disallowed professional fees paid under Section 40(a)(i) of Act to service providers outside India. This on account of fact that no tax had been deducted at source. This by following his order in case of same respondent for A.Y. 2007-08. In above year, respondent s contention that no tax is liable to be deducted in view of fact that payments made to service providers for service outside India were governed by Double Taxation Avoidance Agreement (DTAA) entered into between India with countries in which service providers render service. However, Assessing Officer did not accept same. Consequently, Assessing Officer disallowed professional fees of Rs.7 crores paid under Section 40(a)(i) of Act, for non deduction of tax at source on payments made to service providers in his Assessment Order dated 24th December, 2010. 5. Being aggrieved with Assessment Order dated 24 th December, 2010, respondent filed appeal to Commissioner of Income Tax (Appeals) [CIT(A)]. By order dated 19 th December, 2012, CIT(A) held that amounts were paid to service providers in various countries (except China) were governed by 3 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc DTAA. Thus, dis-allowance for not deducting tax was not justified. Thus, entire amount of Rs. 7 crores which was disallowed was deleted except payment of Rs.33.54 lakhs made to KPMG, China. 6. Being aggrieved, both Revenue and Assessee filed appeals to Tribunal. Revenue being aggrieved with deletion of dis-allowance for non-deduction of tax at source to service providers in all countries (save China). Assessee being aggrieved to extent disallowance for non deduction of tax at source in respect of payment made to service providers in China. Tribunal heard both appeals together. impugned order is common order for Assessment Year 2007-08 and 2008-09. It allowed respondent s appeal and dismissed Revenue s appeal for subject Assessment Year 2008-09 for reasons indicated in its very order while dealing with Assessment Year 2007-08. In Revenue s appeal it found that services received by respondent outside India were in nature of audit and Advisory. It held that none of services had attributes of making available of any technical knowledge to respondents in India. It further held 4 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc that none of service providers had Permanent Establishment (PE) in India. Therefore, it held that payment made to service providers outside India is covered by DTAA. Consequently, same would be outside scope of taxation in India. So far as respondent s appeal in respect of China, Tribunal found that nature of services rendered were professional services and service providers had no PE in India. Thus, covered by Indo-China DTAA. Thus, not taxable in India. 7. In any view of matter, impugned order further holds that at relevant time there was no obligation to deduct tax at source in respect of fees paid to service providers, on basis of its deemed income under Section 9(1)(vii) of Act. It was only by amendment made by Finance Act, 2010 with retrospective effect by adding Explanation to Section 9(1)(vii) of Act, that requirement of service providers providing same in India was done away with, for its application. Thus, making it deemed income subject to tax in India and require tax deduction at source by respondent. However, Tribunal held that yet obligation to deduct tax cannot be created with aid of amendment made 5 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc with retrospective effect, when such obligation was absent at time of making payment to service providers. 8. We inquired of Revenue status of its challenge to impugned order to extent it relates to A.Y. 2007-08. Mr. Suresh Kumar informed us that appeal was dismissed for non-removal of office objections. However, tax effect is less than limit provided in CBDT Circular dated 8 th August, 2019. Thus, appeal would not be pressed. In above circumstances, we took up this appeal for consideration. 9. From questions proposed by Revenue, it is clear that there is no challenge by them to findings of Tribunal that payments made by respondent to its service providers is covered by DTAA. There is no challenge to applicability of DTAA in favour of respondent. In fact, only challenge is question urged, as reiterated by Revenue also at hearing. In these circumstances, findings of Tribunal that payments made to service providers are not subject to tax in India in view of DTAA, is not subject of challenge by Revenue as it does not 6 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc seem to be aggrieved by it. Thus, issue stands covered in favour of respondent in absence of challenge by Revenue. In terms of Section 90(2) of Act, it is open to assessee to adopt either DTAA or Act as is beneficial to it. Revenue having accepted that service providers during relevant period, did not receive any income in view of DTAA, occasion to deduct tax at source would not arise. Therefore, dis-allowance under Section 40(a)(i) of Act will also not arise. 10. In above view, question no.(i) as proposed by Revenue is academic in these facts as application of DTAA which results in no income arising for service providers in India is concluded issue. Therefore, occasion to examine Section 195 of Act in these facts would not arise. 11. So also, question (ii) as proposed is academic as no occasion to deduct tax at source would arise in absence of any income in hands of service providers outside India in view of Section 195 of Act. Even otherwise retrospective amendment cannot cast obligation to deduct tax when not in force at relevant time i.e. when payment was made. In fact, this Court in Commissioner of 7 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Uday S. Jagtap 690-17-ITXA=.doc Income Tax V/s. M/s. NGC Networks (India) Pvt. Ltd. (Income Tax Appeal No.397 of 2005, decided on 29th January, 2018) has held that party cannot be called upon to perform impossible act i.e. to comply with provision which was not in force at relevant time. Admittedly, Explanation if applicable is introduced later by retrospective amendment. Thus, there could be no obligation to deduct tax at source when payments have been made to service providers abroad in absence of specific provision at time when payments were made. 12. In view of above facts, questions as proposed by Revenue are academic, as basis of Tribunal s order that amounts paid to service providers is not income taxable in India in terms of DTAA. This is not being challenged by Revenue in present proceedings. 13. Accordingly, appeal is dismissed. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.) 8 of 8 ::: Uploaded on - 04/10/2019 ::: Downloaded on - 10/10/2019 10:34:54 ::: Commissioner of Income-tax-16 v. KPMG