Cochin Tribunal rules no disallowance of expense for not withholding taxes as payment became taxable on account of amendments made subsequently with retrospective effect

This Tax Alert summarizes a recent ruling of the Cochin Income Tax Appellate Tribunal (Tribunal) in the case of M/s. Kerala Vision Ltd. (Taxpayer) on the issue of disallowance of expense on account of not withholding taxes on payment which became chargeable to tax in the hands of the recipient due to retrospective amendments in the Indian Tax Laws (ITL).

The Taxpayer, which was engaged in the business of distributing cable signals, made payments to channel companies, without withholding tax at source. The Tax Authority disallowed the said payment expenses in the hands of the Taxpayer, contending the same to be in the nature of “royalty” and, hence, liable to tax at source.

The Tribunal held that the Taxpayer cannot be held liable to withhold tax on account of subsequent amendments made in the ITL with retrospective effect.

At times, income of earlier years is rendered taxable by virtue of amendments made subsequently to the ITL with retrospective effect. Retrospective amendments create difficulties for both the payer as well as the recipient of income.

From a payer’s perspective, the question which arises is whether the payer is absolved from withholding tax liability if the payment is made before the retrospective amendments are enacted.

This decision adds to the collection of other favorable rulings and reiterates the principle that retrospective amendments made with respect to taxation of an income, cannot change the tax withholding liability of the payer of such income where it is discharged before the amendment with retrospective effect is made.This ruling should bring relief to taxpayers from the consequences of not withholding taxes on income which is brought within the tax net by virtue of subsequent amendments with retrospective effect.