Strong signal against retrospective amendment

Withholding obligations under income tax laws are not only legally and operationally complicated, but also impose heavy obligations on the taxpayer in the case of default.

If a taxpayer defaults in the deduction of Rs 10 out of a payment of Rs 100 to a vendor, he will have to pay Rs 10 along with interest (say, Rs 2) to the Government. The tax officer may also levy an equal amount as penalty. The expense of Rs 100 will be disallowed, which means the taxpayer’s taxable income will increase by Rs 100 — and he will have to pay additional tax of Rs 33 (at existing rate). In short, the taxpayer may end up paying Rs 55 (Rs 10 + Rs 2 + Rs 10 + Rs 33) due to tax deducted at source, interest, penalty, and additional taxes on account of the disallowance.

The issue is further complicated by retrospective amendments, which are introduced by the Finance Act every year. Often, such amendments may render an item of payment chargeable to tax in the hands of the recipient while it may not have been so previously.

Practically, the taxpayer would have considered the tax laws prevailing at the time of payment for withholding taxes. If the law is amended with retrospective effect, it becomes impossible for the taxpayer to withhold taxes on payments made earlier. If the abovementioned obligations of tax, interest, penalty and disallowances are imposed, it would greatly burden the taxpayer.

Recently, in the case of Channel Guide India Ltd vs. ACIT, the Mumbai Tribunal dealt with the above issue. With respect to the video channel business, the taxpayer had claimed expenses on account of broadcasting and telecasting without deduction of taxes. At the time of payment, the position adopted by the taxpayer was supported by the ruling of the Tribunal in the case of the payee, and the Delhi High Court’s decision in the case of Asia Satellite Telecommunication Co Ltd. The assessing officer disallowed the expenses on account of non-deduction of taxes.

Revenue authorities relied on the amendments introduced by the recent Finance Act, 2012, which clarified that payments for processes which include transmission by satellite (including up-linking and down-linking of any signal) would amount to royalty and, hence, chargeable to tax in India. The Tribunal relied on the legal maxim “ lex non cogit ad impossiblia ”, meaning that the law cannot compel a person to do something which is impossible to perform. It held that the payment by the taxpayer was not taxable in India according to the legal position at the relevant time and, therefore, the taxpayer was not liable to deduct tax at source, and there was no question of disallowing the said amount by invoking the provisions [Section 40(a)(i)] of the Income-tax Act.

The ruling is welcome, as it provides relief to taxpayers from the rigours of retrospective amendment. This decision may be helpful to taxpayers not only to contest withholding tax proceedings and disallowance of expense, but also save on additional interest and penalty exposure.

Sunil M. Lala is Partner, KPMG, Tax Dispute Resolution

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