© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Retrospective amendment, short deduction of TDS should not attract disallowance under Section 40(a)(ia) with respect to payment of placement fees

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The Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of NGC Networks (I) Pvt. Ltd. (the taxpayer), held that payment made by the taxpayer towards placement charges is not ‘royalty’ in terms of Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961 (the Act). Further, the retrospective insertion of Explanation 6 to Section 9(1)(vi) of the Act cannot be pressed into service for purposes of Section 40(a)(ia), as the same was not in statute when the taxpayer deducted tax at source.

The Tribunal also noted that no disallowance under Section 40(a)(ia) can be made on account of short deduction of taxes at source.

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Retrospective amendment, short deduction of TDS should not attract disallowance under Section 40(a)(ia) with respect to payment of placement fees

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Retrospective amendment, short deduction of TDS should not attract disallowance under Section 40(a)(ia) with respect to payment of placement fees 17 July 2014 Background The Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal), in the case of NGC Networks (I) Pvt. Ltd. 1 (the taxpayer), held that payment made by the taxpayer towards placement charges is not ‘royalty’ in terms of Explanation 2 to Section 9(1)(vi) of the Income-tax Act, 1961 (the Act). Further, the retrospective insertion of Explanation 6 to Section 9(1)(vi) of the Act cannot be pressed into service for purposes of Section 40(a)(ia), as the same was not in statute when the taxpayer deducted tax at source. The Tribunal also noted that no disallowance under Section 40(a)(ia) can be made on account of short deduction of taxes at source. ______________ 1 ACIT v. NGC Networks (I) Pvt. Ltd. [ITA No 1382/Mum/2014 & CO No 68/Mum/2014] Facts of the case  The taxpayer paid placement charges to cable operators for placing their channel on a particular frequency or bandwidth so as to maximise viewership and increase quality of the channel being aired. On such payments, the taxpayer deducted taxes at 2 per cent under Section 194C of the Act.  The tax officer was of the view that placing a particular channel on a particular frequency is an integral part of the transmission and broadcasting process. Accordingly, the said payment constitutes royalty, and taxes ought to have been deducted at 10 per cent under Section 194J of the Act. Since the taxpayer has deducted taxes at 2 per cent under Section 194C of the Act, the provisions of Section 40(a)(ia) of the Act are attracted for disallowance.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Dispute Resolutions Panel (DRP), after considering the definition of ‘process’, inserted with retrospective effect by the Finance Act, 2012, by way of Explanation 6 to Section 9(1)(vi) of the Act, held that the payment of placement fees does not tantamount to payment of fees for transmission purpose and does not constitute royalty under the Act.  Accordingly, the DRP held that disallowance under Section 40(a)(ia) is not warranted. Tribunal’s ruling  The Tribunal held that channel placement fee paid to cable operators/DTH providers cannot be regarded as royalty as it does not fall under the definition of ‘royalty’ under Explanation 2 to Section 9(1)(vi) of the Act.  Further, with respect to the Explanation 6 inserted by the Finance Act, 2012, with effect from 1 July 1976, the Tribunal held that the same cannot be pressed into service for the purpose of disallowance under Section 40(a)(ia) of the Act because at the time when the taxpayer deducted the tax at source, the said explanation was not on statute. In this regard, the Tribunal considered the decisions in the case of Channel Guide India Limited 2 and Sterling Abrasives 3 , wherein it has been held that law cannot compel a taxpayer to do something which is impossible to perform.  Accordingly, in the instant case, the Tribunal held that when the taxpayer has deducted tax under Section 194C of the Act, which is a bona fide decision, keeping in view the nature of payments and facts of the case, it is not supposed to forsee the subsequent retrospective amendment in the statue to deduct tax at source under Section 194J of the Act.  Further, the Tribunal also referred to the decision of the Calcutta High Court in the case of S.K Tekriwal 4 , wherein it is held that if there is any shortfall due to difference of opinion, no disallowance under Section 40(a)(ia) can be made on account of shortfall in the deduction of taxes at source. _____________ 2 Channel Guide India Limited v. ACIT [2012] 139 ITD 49 (Mum) 3 Sterling Abraive Ltd v. ACIT [2011] 140 TTJ 68 (Ahd) 4 CIT v. S.K. Tekriwal (ITA No. 183 of 2012)  The Tribunal also relied on the decision in case of SKOL Breweries 5 (which in-turn relies on the decision of Sonata Information Technology Limited 6 ) and held that Explanation 6 cannot be pressed into service, as the definition of ‘royalty’ for the purpose of Section 40 refers to ‘royalty’ as per Explanation 2 to Section 9(1)(vi) of the Act [and does not refer to Explanation 6 to Section 9(1)(vi)].  Accordingly, the Tribunal upheld the order of the DRP and held that no disallowance should be made under Section 40(a)(ia) of the Act on account of placement charges paid by taxpayer to cable operators. Our comments This decision of the Mumbai Tribunal reaffirms the position that a taxpayer cannot be saddled with a liability to deduct tax in view of a retrospective amendment. It also upholds the view that there can be no disallowance on account of short deduction of tax. Although the Mumbai Tribunal has granted relief to the taxpayer, the decision does not deal with the issue whether placement charges constitute ‘royalty’ in the light of the retrospective amendment [Explanation 6 to Section 9(1)(vi) of the Act], and are liable for TDS under Section 194J, or under Section 194C, being payments for broadcasting/telecasting. Given the uncertainty and the approach of the tax authorities, the payments of placement charges by TV broadcasters will continue to suffer tax withholding at a higher rate under Section 194J of the Act, unless any clarity on the issue is provided by any court/circular. __________________ 5 SKOL Breweries Ltd v. ACIT [2013] 153 TTJ 257 (Mum) 6 Sonata Information Technology Ltd v. DCIT [2012] 54 SOT 233 (Mum)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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