2014 (11) TMI 484 - AT - Income Tax

Channel placement fees u/s 40(a)(ia) disallowed TDS not deducted u/s 194J Held that - The DRP held that the disallowance u/s. 40(a)(ia) on account of short deduction of tax is not warranted - the channel placement fee paid to the cable TV operator/DTH provider cannot be regarded as royalty as it does not fall under the definition in terms of Explanation-2 of Section- 9(1)(vi) of the Income tax Act - Though there is an amendment in the provision and as per newly inserted Explanation-6 with retrospective effect the term process has been defined and it includes transmission, uplinking and down linking of signals etc. But the said retrospective amendment cannot be pressed into service for the purpose of disallowance u/s. 40(a)(ia) because of the reason that at the relevant time when the Assessee has deducted the tax at source it was not in the statute relying upon M/s. Channel Guide India Limited vs. ACIT 2012 (9) TMI 95 - ITAT MUMBAI - the amount in question paid by the assessee to SSA was not taxable in India in the hands of SSA either u/s.9(1)(vi) or 9(1)(vii) as per the legal position prevalent at the relevant time and the assessee therefore was not liable to deduct tax at source from the said amount paid to M/s. SSA and there was no question of disallowing the said amount by invoking the provisions of sec.40(a)(i) - when the royalty for transfer of right to use of computer software does not fall under Explanation 2 to sec. 9(1)(vi), but the same falls under Explanation 4 to sec. 9(1)(vi), then in view of the Explanation to sec. 40(a)(i), the amount cannot be disallowed under the provisions of sec. 40(a)(i) of the Act Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 7,18,19,004/- made on account of channel placement fees under Section 40(a)(ia) due to non-deduction of TDS under Section 194J.
2. Applicability of Section 194C versus Section 194J for TDS deduction on channel placement fees.
3. Impact of retrospective amendments to Section 9(1)(vi) on the disallowance under Section 40(a)(ia).

Detailed Analysis:

1. Deletion of Disallowance of Rs. 7,18,19,004/-:
The Revenue challenged the deletion of disallowance of Rs. 7,18,19,004/- made by the Assessing Officer (AO) under Section 40(a)(ia) due to the Assessee's short deduction of TDS under Section 194C instead of Section 194J. The AO argued that channel placement fees are akin to royalty as defined under Explanation 2 to Section 9(1)(vi) and should attract TDS at 10% under Section 194J. Conversely, the Assessee maintained that the fees do not involve any process of transmission or uplinking/downlinking of signals, thus falling under Section 194C, which mandates a 2% TDS deduction.

2. Applicability of Section 194C versus Section 194J:
The Dispute Resolution Panel (DRP) concluded that channel placement fees do not qualify as royalty under Explanation 2 to Section 9(1)(vi) and thus, Section 194J is not applicable. The DRP also considered the retrospective amendment introducing Explanation 6 to Section 9(1)(vi) but found it irrelevant for the disallowance under Section 40(a)(ia) since it was not in the statute at the time of the TDS deduction. The Tribunal upheld this view, emphasizing that the Assessee's deduction under Section 194C was a bona fide decision based on the nature of the payments and the facts of the case.

3. Impact of Retrospective Amendments:
The Tribunal referenced the case of M/s. Channel Guide India Limited vs. ACIT, where it was held that a taxpayer cannot be compelled to comply with a law that was not in effect at the time of the transaction. This principle was supported by the legal maxim "lex non cogit ad impossiblia," meaning the law does not compel the impossible, and was upheld by the Hon'ble Supreme Court in Krishna Swamy S. PD and Another vs. Union of India. The Tribunal also cited the Hon'ble Calcutta High Court's decision in CIT vs. S.K. Tekriwal, which ruled that shortfall in TDS deduction due to differences in opinion on taxability does not warrant disallowance under Section 40(a)(ia).

Conclusion:
The Tribunal concluded that the channel placement fees paid by the Assessee do not constitute royalty under Explanation 2 to Section 9(1)(vi) and that the retrospective amendment (Explanation 6) cannot be applied for disallowance under Section 40(a)(ia). Consequently, the Tribunal dismissed the Revenue's appeal and the Assessee's cross-objection, affirming the DRP's directions.

Order Pronounced:
The appeal of the Revenue and the cross-objection of the Assessee were dismissed, with the order pronounced on the 9th of July, 2014.