Section 9 –For withholding of tax, law prevailing at the time of payment is applicable; hence, retrospective amendment does not create withholding default
Facts:
The Taxpayer, an Indian resident, made payments to nonresident (NR) parties for monitoring, supervision of discharged cargo, undertaking draft survey, joint sampling of such discharged cargo, photographs, sample preparation, sealing of samples, analysis of grade etc. The services were rendered outside India by the NR.
The Taxpayer did not withhold tax on payments made to NR in the belief that payments made to NR did not constitute FTS under the Act and further that income from services rendered outside India did not accrue or arise in India as NR did not have a Permanent establishment (PE) in India and services were rendered outside India.
Tax Authority contended that by virtue of retrospective amendment to Explanation to section. 9, income of NR is deemed to accrue or arise in India irrespective of whether NR has a place of business in India or whether services are rendered in India. Hence, such income is taxable in India under the Act.
Held:
The Tribunal did not analyse the nature of payments made by the Taxpayer and held that once the payment is in the nature of Fee for technical services (FTS), Explanation to section 9 becomes applicable. Explanation to section 9 introduced by the Finance Act, 2010 (retrospectively with effect from 1st June 1976) provides that FTS will be deemed to accrue and arise in India whether or not NR has residence or place of business or business connection in India or the NR has rendered services in India.
It is undisputed that NR does not have a place of business or business connection in India and neither does NR render services in India. Thus, income from services to Taxpayer accrues or arises outside India. However, by virtue of Explanation to section 9, the same is regarded as deemed to accrue or arise in India.
In the present facts, payments were made by the Taxpayer before the retrospective amendment to Explanation to section 9. Thus at the time of payment, there was no provision under the Act, deeming FTS to accrue or arise in India and hence, the Taxpayer was not liable to withhold taxes on payments made to NR. The Tribunal held that the law prevailing at the time of payment has to be kept in mind. Since at the time of payments, income was not regarded as accruing or arising in India, there was no need to withhold taxes at the time of making payments.
