2018 (5) TMI 1148 - HC - Income Tax

TDS u/s 194C OR 194J - disallowance of Channel Placement Fee - tds liability - disallowance u/s. 40(a)(ia) - Held that - The amendment by introduction of Explanation 6 to Section 9(1)(vi) of the Act took place in the year 2012 with retrospective effect from 1976. This could not be have been contemplated by the Respondent when he made the payment which was subject to tax deduction at source under Section 194C during the subject Assessment Year would require deduction under Section 194J of the Act due to some future amendment with retrospective effect. As under Section 40(a)(i) under which the expenditure has been disallowed by the Revenue meaning of royalty as defined therein is that as provided in Explanation 2 to Section 9(1)(vi) of the Act and not Explanation 6 to Section 9(1)(vi) of the Act. Thus the disallowance of expenditure under Section 40(a)(i) of the Act can only be if the payment is Royalty in terms of Explanation 2 to Section 9 (1)(vi) of the Act. Undisputedly the payment made for channel placement as a fee is not royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act. Therefore no disallowance of expenditure under Section 40(a)(vi) of the Act can be made in the present facts - Decided in favour of assessee Whether Channel Placement Fee is not in the nature of royalty u/s. 9(1)(vi) and so the tax is not required to be deducted u/s. 194J of the I.T. Act ? - Held that - In view of the appeal not being entertained on question (a) as pointed out herein above the issue raised in question(b) becomes academic. This is so as irrespective of the nature of payment made in the present facts no expenditure can be disallowed under Section 40(a)(i) of the Act in respect of fee paid for Channel Placement.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(a) Whether the Income Tax Appellate Tribunal (Tribunal) was justified in holding that disallowance of the Channel Placement Fee under Section 40(a)(ia) of the Income Tax Act, 1961 (the Act) could not be made when tax was deducted at source under Section 194C instead of Section 194J of the Act;

(b) Whether the Tribunal was justified in holding that the Channel Placement Fee is not in the nature of royalty under Section 9(1)(vi) of the Act, and hence tax was not required to be deducted under Section 194J of the Act, despite Explanation 6 thereto being inserted with retrospective effect from 01/06/1976.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of disallowance under Section 40(a)(ia) when tax was deducted under Section 194C instead of Section 194J

Relevant legal framework and precedents: Section 40(a)(ia) of the Act provides for disallowance of expenditure if tax is not deducted or paid at source as required under the Act. Section 194C pertains to tax deduction at source on payments to contractors at 2%, whereas Section 194J relates to tax deduction on fees for professional or technical services, including royalty, at 10%. Explanation 6 to Section 9(1)(vi) defines the nature of royalty for tax purposes. The amendment inserting Explanation 6 was introduced in 2012 with retrospective effect from 1976. The Court referred to the legal maxim lex non cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform) and the precedent of CIT v/s. Cello Plast (2012) 209 Taxmann 617.

Court's interpretation and reasoning: The Tribunal held that the Respondent-Assessee was not liable to deduct tax at the higher rate under Section 194J for the Channel Placement Fee because at the time of payment (Assessment Year 2009-10), the relevant provision (Explanation 6) was not in force. The retrospective amendment could not impose an obligation retrospectively on the Assessee to deduct tax under Section 194J, as this would amount to requiring compliance with a provision not in existence at the relevant time. The Court agreed with this view, emphasizing that a party cannot be compelled to perform an impossible act, i.e., comply with a law introduced later with retrospective effect.

Key evidence and findings: The Respondent deducted tax at 2% under Section 194C on payment of Rs. 7.18 Crores as Channel Placement Fee to cable operators. The Assessing Officer sought to disallow the entire expenditure under Section 40(a)(ia) for failure to deduct tax at 10% under Section 194J, treating the payment as royalty. The Dispute Resolution Panel (DRP) upheld the Respondent's objection, holding that the payment was not royalty as per the definition existing at the time.

Application of law to facts: Since the amendment introducing Explanation 6 to Section 9(1)(vi) was made in 2012 with retrospective effect from 1976, it was not in force at the time of payment in the Assessment Year 2009-10. The Respondent could not have been expected to deduct tax under Section 194J based on a provision not then applicable. Further, the disallowance under Section 40(a)(ia) requires the payment to be 'royalty' as defined in Explanation 2 to Section 9(1)(vi), which was not the case here.

Treatment of competing arguments: The Revenue argued that the Channel Placement Fee was in the nature of royalty and hence tax should have been deducted under Section 194J at 10%. The Respondent contended that the payment was not royalty as per the law prevailing at the time and tax was correctly deducted under Section 194C. The Court favored the latter, rejecting retrospective imposition of tax deduction obligations.

Conclusions: The Court held that the Tribunal was justified in not allowing disallowance under Section 40(a)(ia) for failure to deduct tax under Section 194J. The Respondent was entitled to deduct tax under Section 194C at the time of payment, and retrospective amendments could not be applied to impose higher tax deduction obligations.

Issue (b): Whether Channel Placement Fee is in the nature of royalty under Section 9(1)(vi) requiring tax deduction under Section 194J

Relevant legal framework and precedents: Section 9(1)(vi) defines royalty for income tax purposes. Explanation 6 was introduced retrospectively to clarify the nature of royalty. Section 194J mandates tax deduction on fees for professional or technical services, including royalty.

Court's interpretation and reasoning: Since the Court did not entertain Question (a), the issue of whether the Channel Placement Fee constituted royalty under Section 9(1)(vi) became academic. The Court noted that irrespective of the nature of the payment, no disallowance could be made under Section 40(a)(ia) in respect of the Channel Placement Fee.

Key evidence and findings: The DRP had held that the payment did not fall within the ambit of royalty as per the definition applicable at the relevant time. The Tribunal followed this view.

Application of law to facts: Given the non-entertainment of Question (a), the Court found no substantial question of law arose on Question (b).

Treatment of competing arguments: The Revenue's argument that the fee was royalty was not considered since the primary question on tax deduction under the correct section was not entertained.

Conclusions: The Court declined to entertain Question (b) as academic, holding that it did not raise any substantial question of law.

3. SIGNIFICANT HOLDINGS

The Court held:

"A party cannot be called upon to perform an impossible Act i.e. to comply with a provision not in force at the relevant time but introduced later by retrospective amendment."

"The amendment by introduction of Explanation 6 to Section 9(1)(vi) of the Act took place in the year 2012 with retrospective effect from 1976. This could not have been contemplated by the Respondent when he made the payment which was subject to tax deduction at source under Section 194C of the Act."

"Under Section 40(a)(i) of the Act, the meaning of royalty is as provided in Explanation 2 to Section 9(1)(vi) of the Act and not Explanation 6 to Section 9(1)(vi) of the Act. Undisputedly, the payment made for channel placement as a fee, is not royalty in terms of Explanation 2."

The Court dismissed the appeal, holding that no disallowance under Section 40(a)(ia) could be made for failure to deduct tax under Section 194J when tax was deducted under Section 194C at the time of payment, and that the Channel Placement Fee was not royalty under the applicable law.

← Previous Next →