The Bombay High Court in The Commissioner of Income Tax 11 v. NGC Networks (India) Pvt. Ltd ruled that disallowance under Section 40(a)(i) of the Income Tax Act can be made only if the Royalty falls under Explanation 2 to section 9(1)(vi) but not if it falls under Explanation 6 to s. 9(1)(vi).
While concluding the matter in favour of the assessee, the division bench held that the payment made for channel placement as a Fee is not royalty.
During the relevant assessment year, Assessing Officer took a view that tax deducted at source on payment of channel placement fee about 7 crore to cable operators had to be at the rate of 10% by invoking section 194J of the Income Tax Act and not section 194C of the Income Tax Act, as the payment was in the nature of royalty defined in Explanation 6 to section 9(1)(vii) of the Income Tax Act.
Accordingly, AO disallowed the entire expenditure of such payment for failure to deduct tax under section 194J of the act. By preferring its objection in DRP, they upheld the decision of respondent by holding that deduction of tax at source was appropriately made as such payment wouldn’t fall under the ambit of royalty as decided by AO.
Being aggrieved revenue carried the matter before tribunal wherein held that Assessee is not liable to deduct the tax at source, at higher rate only on account of the subsequent amendment made in Act, with retrospective effect from 1976.
While hearing the appeal preferred by the Revenue, the bench comprising Justice M.S.Sanklecha and Justice Riyaz I. Chagla held that a party cannot be called upon to perform an impossible Act especially a provision not in force at the relevant time but introduced later by retrospective amendment.
Court observation regarding the case was “section 40(a)(i) of the Act, under which the expenditure has been disallowed by the Revenue, meaning of royalty as defined therein, is that as provided on 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 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”.
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