The payer of income does tax deduction as per the law in force when she makes remittance. The Indian legislature has powers to make retrospective amendment to the statutes. Similarly, a judicial decision, which is always retrospective, may reverses a settled position on taxability of income in the hands of payee.
A question arises as to when a retrospective amendment is made, whether it also retrospectively impacts the TDS provisions. For example, by Finance Act 2012, a retrospective amendment was made to the definition of royalty with retrospective effect from 01.04.1976. One of the objectives was to cover software payments within the definition of royalty.
Similarly, the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) (passed on October 15, 2011) held that software purchases are liable for TDS. Prior to this decision, the Courts had consistently taken a view that software purchases are not liable for TDS.
Therefore, an issue arose whether TDS liability can be fastened by retrospective amendment or subsequent Court decision on the payer to deduct tax at source on software purchase. TDS is a vicarious or secondary liability. The retrospective amendment cannot create a retrospective liability to deduct TDS. This is for the reason that the detector would have remitted the amount to the payee without deducting TDS as per the law prevailing. There would be impossibility of performance from the deductor’s prospective (Maxim ‘lex non cogit ad impossiblia’). Statute cannot ask the deductor to perform something, which is impossible. Therefore, a retrospective amendment can create retrospective liability on a person who earns the income and not on the payer.
In many cases, the Courts have dealt with the issue whether the assessee can be fastened with the TDS liability on account of subsequent retrospective amendment or subsequent ruling of the Court. The courts have held that such liability cannot be fastened. Accordingly, the Courts have quashed the Orders passed u/s 201(1) and 201(1A) of the Act. Also, disallowance made u/s 40(a)(i) of the Act have been deleted. These cases are discussed below:
Cases where 40(a)(i)/40(a)(ia) disallowance were deleted
Channel Guide India Ltd (2012) 25 Taxmann.com 25 (Mumbai ITAT) – The Assessee made payment for facility of satellite Up-linking and Telecasting programmes. TDS was not deducted and AO made disallowance. Applying the maxim ‘lex non cogit ad impossiblia’, the ITAT held that amendment will not to apply to deductor. The ITAT held that the assessee could not be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In the said case. Explanation to section 9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and it was held by the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee.
Metro & Metro v Ad.CIT  39 taxmann.com 26 (Agra – Trib.) – The ITAT held that expense disallowance for non-deduction of TDS u/s 40(a)(i) was not applicable as the leather testing services in that case became taxable only by virtue of retrospective amendment to Sec 9(1) by Finance Act, 2010.
Virola International  42 taxmann.com 286 (Agra ITAT) – Held that retrospective amendment in law cannot change the tax withholding liability with retrospective effect, but changes only the tax liability in respect of an income with retrospective effect.
New Bombay Park Hotel Pvt. Ltd TS-522-ITAT-2013(Mumbai ITAT) – The assessee made payment for Transfer of design etc. Services outside India. The ITAT held that retrospective amendment does not create any additional TDS liability as the legal position prevailing at the relevant time should be considered.
NGC Networks (India) Pvt Ltd [TS-41-HC-2018(BOM)] – The Assessee had made payment for channel placement fee. Disallowance was made under section 40(a)(i). The ITAT deleted the disallowance on the ground that retrospective amendment does not create any TDS liability. The head see upheld the order of the Tribunal. The HC also observed that that meaning of royalty for the purposes of Sec. 40(a)(ia) is as provided in Explanation 2 to Section 9(1)(vi) and not Explanation 6 to Section 9(1)(vi), since channel placement fee is not royalty in terms of Explanation 2 to Section 9(1)(vi), HC holds disallowance u/s. 40(a)(ia) cannot be made
Courts have consistently upheld the above view. Some decisions are:
- ITO v. Clear Water Technology Services (P.) Ltd  52 taxmann.com 115 (Bang. – Trib.) – The Assessee made payment for telecom services. The Tribunal held that liability to deduct tax at source under Section 195 of the IT Act cannot be fastened on an assessee on the basis of retrospective amendment. Also refer for AY 11-12 in ITA No.1419/Bang/2017.
- Sonic Biochem Extractions (P.) Ltd. v. ITO (2013 – 35 taxmann.com 463) – payment towards purchase of software leading to disallowance u/s 40(a)(ia).
- DDIT (Int’l Tax) vs Igate Computer Systems Ltd ITA No.1172 to 1174/PN/2013
- Kerala Vision Ltd v ACIT  46 taxmann.com 50 (Cochin – Trib.)
- ITO v Bovis Lend Lease India P Ltd (2012) 21 Taxmann.com 100 – The ITAT held that retrospective amendment to section 9 cannot apply to deductor. It applies to recipient of income.
- TTK Prestige [TS-555-ITAT-2014(Bang)] – Assessee made payment towards royalty on export sales. The AO made disallowance u/s 40(a)(ia). The Assessee relied on Madras HC decision in Aktiengesellschaft Kuhnle Kopp wherein it was held that royalty payment was not liable to TDS when it was made for earning income from source outside India (i.e export sales). The ITAT observes that payment was made before introduction of retrospective amendment, by virtue of which ‘territorial nexus’ is no longer required to tax ‘receipts’ of non-residents. The ITAt holds that assessee could not be held in default for non-deduction of tax when such retro amendment was introduced subsequent to payment.
- ACIT vs. Ajit Ramakant Phatarpekar (ITAT Panaji)  56 taxmann.com 357 (Panaji – Trib.) – The ITAT held that if an amount becomes taxable due to a retrospective amendment, payments prior to the amendment cannot be disallowed for want of TDS. The ITAT held that Assessee cannot be penalized for performing an impossible task of deducting TDS in accordance with the law which was brought into the statute book much after the point of time when the tax deduction obligation was to be discharged
Cases dealing subsequent Judicial Decision and its impact on TDS deduction
In the case of Aurigene Discovery Technologies (P.) Ltd. [IT (TP) Appeal No. 1479 (Bang.) of 2015, the Assessee had made payment for software purchase. Since TDS was not deducted, the AO made disallowance u/s 40(a)(ia). Before the ITAT, the Assessee submitted that prior to the decision of Karnataka HC in the case of CIT (International Taxation) v. Samsung Electronics Co. Ltd.  320 ITR 209/ 185 Taxman 313 (Kar.), the assessee was under the bona fide belief that the payment on account of software licenses does not fall under the definition of royalty and therefore the assessee was under no obligation to deduct tax at source on the said payment for software license. Thus, the Assessee submitted that a subsequent amendment or a decision cannot be thrust upon the assessee for deduction of tax in respect of a transaction completed much prior to the said decision. The Tribunal accepted the contention and deleted the disallowance.
Same view is taken in the following cases (disallowance for not deducted TDS on software purchases):
- Allegis Services India (P.) Ltd vs DCIT  86 taxmann.com 63 (Bangalore-Trib.)
- Teekays Interior Solutions Pvt Ltd vs DCIT [ITA No.400/Bang/2017] [AY 2011-12] –
- Ingersoll Rand India Ltd v ACIT  112 taxmann.com 343 (Bangalore – Trib.)
- ACIT v Acer India Pvt Ltd ITA No 119/Bang/2016.
Cases where Order under section 201 were quashed in the context of TDS u/s 192
In the case of Canara Bank v ITO (2008) 121 ITD 1 (ITAT Nagpur), 41B BCAJ 529, the Assessee provide accommodation to employees and recovered fixed charges. When Assessee deducted TDS, as per section 17, there was no concession. Retrospective amendment was made to section 17(2) deeming that there is a concession. The AO held that TDS to be deducted. The Assessee contended that it deducted TDS as per the law and it has no remedy to recover the tax. The Tribunal held that the assessee is not at default. The ITAT held that even if amendment had been brought into section 17(2) with retrospective effect, assessee could not be treated as an ‘assessee-in-default’ retrospectively and interest under section 201(1A) could not be charged on a liability which came into existence by a retrospective amendment.
Same view is taken in the following cases:
- SBI v DCIT 2010-TIOL-231-ITAT-HYD, (2010) 40 SOT 160 (Hyderabad ITAT)
- ONGC 2011-TIOL-227-ITAT-MUM
Cases where Order under section 201 were quashed in the context of Royalty (software, gartner, etc)
In the case of Acer India Pvt Ltd v DCIT IT(IT)A No. 107 to 114/Bang/2018, the Assessee made payment towards purchase of software but did not deduct TDS. The AO passed order under section 201 and held that the assessee should have deducted TDS. Before the Tribunal, the assessee contended that it could not be treated as assessee in default as at the time when the assessee made payment for purchase of software, there were favourable decisions which held that there is no liability to deduct TDS on software purchases. The assessee contended that the decision of Karnataka High Court in the case of Samsung is dated 15 October 2011 and before that date it cannot be treated as assessee in default. The Tribunal accepted the contention of the assessee and held that up to 15 October 2011, it cannot be treated as assessee in default for non-deduction of TDS on purchase of software.
In the case of Wipro Ltd v DCIT ITA No. 581/Bang/2019, the assessee made payment to M/s Gartner group for license for using its data base. The AO held that TDS should have been deducted and passed order u/s 201(1). The Tribunal quashed the Order following Acer India.
EPRSS Prepaid Recharge Services India P. Ltd. vs. ITO  100 taxmann.com 52 (Pune – Trib.); TS-623-ITAT-2018 (Pune) – The Assessee made payment for server space. The ITAT held that since the payments were made by the Taxpayer to Amazon before the retrospective amendment came into force, the Assessee cannot be held to be in default for failure to withhold taxes on the basis of retrospective amendment.
Same view is taken in the following cases:
- Sartorius Stedium India Pvt Ltd v ACIT ITA No. 2019/Bang/2019