Retrospective amendment cannot change tax withholding liability with retrospective effect

Retrospective amendment cannot change tax withholding liability with retrospective effect though it changes tax liability in respect of an income with retrospective effect

ABCAUS Case Law Citation
ABCAUS 3521 (2021) (07) ITAT

Important case law relied referred:
M/s Euro RSCG Worldwide Inc.
M/s Virola International   
Ashapura Minichem Ltd. vs ADIT 131 TTJ 291

In the instant appeal, the assessee had challenged the order of CIT(A) in confirming the disallowance on account of non deduction of tax u/s 195 by invoking the provisions of section 40(a)(i) of the Income Tax Act, 1961 (the Act).

The appellant company was engaged in the business in the advertising industry and was a sister company of a foreign company.

The appellant company had entered into a Multinational Client Coordination Service Agreement with the said parent company and during the year under consideration paid amount without deduction of TDS.

The case of the assessee was re-opened for assessment and the assessment was framed u/s 147 of the Act.

While framing the assessment, the Assessing Officer (AO) did not accept the explanation offered by the assessee regarding non-applicability of provision for deduction of tax and therefore he made addition by invoking the provision of section 40(a)(i) on account of non-deduction of tax u/s 195 read with explanation 2 of section 9(1)(vii)(b) of the Act.

The CIT(A) opined that the Finance Act 2010 had inserted explanation to section 195 w.e.f 01/04/1976 making the provisions for TDS applicable from with retrospective date from 01/04/1976

The Tribunal observed that the coordinate Bench on similar facts had opined that the earlier to the said amendment, unless the technical services were rendered in India, the fees for such services could not be brought to tax u/s 9(1)(vii).   

The Tribunal stated that the law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future.

The Coordinate Bench held that retrospective amendment in law does change the tax liability in respect of an income, with retrospective effect, but it cannot change the tax withholding liability, with retrospective effect.

Following the Coordinate Bench, the ITAT held that the Assessing Officer was not justified in fastening the liability of tax deduction by relying on the retrospective amendment.

Accordingly,  the Tribunal directed the Assessing  Officer  to  delete  the addition and the grounds raised were allowed in favour of the assessee.

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