Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

Business expenditure – Disallowance u/s 40(a)(ia) – Payments liable to deduction of tax at source – Royalty: (i) Amendment to definition in 2012 with retrospective effect from 1976 – Assessee could not be expected to foresee future amendment at time of payment – Disallowance not called for; (ii) Disallowance attracted only for royalty as defined in Explanation 2 to section 9 – Channel placement fee of Rs. 7.18 crores to cable operators – Not royalty – Explanation 6 cannot be invoked to disallow payment

During the previous year relevant to the A.Y. 2009-10, the assessee paid channel placement fees of Rs. 7.18 crores to cable operators deducting tax at source u/s 194C at the rate of 2%. The A.O. was of the view that the tax had to be deducted at source on payment at the rate of 10% u/s 194J as the payment was in the nature of royalty, as defined in Explanation 6 to section 9(1)(vi) and disallowed the entire expenditure of Rs. 7.18 crores u/s 40(a)(ia) for failure to deduct tax u/s 194J. The Dispute Resolution Panel upheld the assessee’s objections holding that deduction of tax at source was properly made u/s 194C. The A.O. passed a final assessment order accordingly.

On appeal by the Department, the Tribunal held that the assessee was not liable to deduct the tax at source at higher rates only on account of the subsequent amendment made in the Act, with retrospective effect from 1976.

On further appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

‘i) The view taken by the Tribunal that a party could not be called upon to perform an impossible act, i. e., comply with a provision not in force at the relevant time but introduced later by retrospective amendment, was in accordance with the legal maxim lex non cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform). The amendment by introduction of Explanation 6 to section 9(1)(vi) took place in the year 2012 with retrospective effect from 1976. It could not have been contemplated by the assessee when it made the payment during the assessment year that the payment would require deduction u/s 194J due to some future amendment with retrospective effect.

ii) Under section 40(a)(ia), royalty is defined as in Explanation 2 to section 9(1)(vi) and not in Explanation 6 to section 9(1)(vi). Undisputedly, the payment made for channel placement as a fee was not royalty in terms of Explanation 2 to section 9(1)(vi). Therefore, no disallowance of expenditure u/s 40(a)(i) could be made.’