Bombay High Court: Short TDS Deduction Cannot Attract Disallowance Under Section 40(a)(ia) — PCIT Vs Media Worldwide Ltd.

Overview of the Dispute

The Bombay High Court, in PCIT Vs Media Worldwide Ltd., delivered a significant ruling by dismissing the Revenue's appeal preferred under Section 260A of the Income-tax Act, 1961 for Assessment Year 2012-13. The appeal was directed against the order of the Income Tax Appellate Tribunal, Mumbai Bench, passed in ITA No. 5863/Mum/2017, which had upheld the deletion of disallowance made under Section 40(a)(ia) of the Act.

The central controversy revolved around whether deducting tax at source under a provision different from the one allegedly applicable — resulting in a lower rate of deduction — could be equated to non-deduction of tax for the purpose of triggering disallowance under Section 40(a)(ia).

Background and Facts of the Case

The assessee in this matter was engaged in the business of telecasting programmes. During the course of assessment proceedings under Section 143(3), the Assessing Officer examined the following expenditure claims:

  • Channel carriage fees / channel placement fees: Rs. 11,65,28,137/-
  • Uplinking charges: Rs. 98,09,816/-
  • Bandwidth charges: Rs. 3,27,14,058/-

The assessee had deducted tax at source at 2% under Section 194C of the Income-tax Act, 1961 on all three categories of payments. However, the Assessing Officer took the position that these payments represented consideration for the use or right to use a "process" within the meaning of Explanation 6 to Section 9(1)(vi) of the Act, and therefore constituted royalty. Consequently, the applicable TDS provision, according to the Revenue, was Section 194J, which mandates deduction at 10%.

On this basis, the Assessing Officer concluded that the assessee had failed to deduct tax under the correct provision and invoked Section 40(a)(ia) to disallow the aggregate expenditure of Rs. 15,90,52,011/-.

Proceedings Before Lower Authorities

Commissioner of Income Tax (Appeals)

The assessee challenged the disallowance before the Commissioner of Income Tax (Appeals). By an order dated 5th June 2017, the CIT(A) allowed the appeal and directed deletion of the disallowance. The CIT(A) held that the present case was not one of non-deduction of tax at source but, at the highest, a case of lesser or short deduction of tax. Since Section 40(a)(ia) applies only to cases of non-deduction or non-payment after deduction, the disallowance could not be sustained.

Income Tax Appellate Tribunal

Being aggrieved, the Revenue preferred an appeal before the Tribunal. The Tribunal, while following its own earlier orders passed in the assessee's case for preceding assessment years, concurred with the CIT(A)'s findings. It held that the assessee had correctly deducted tax under Section 194C and accordingly dismissed the Revenue's appeal.

Questions of Law Raised Before the Bombay High Court

The Revenue framed four questions of law before the High Court:

  1. Whether the Tribunal erred in deleting the disallowance under Section 40(a)(ia) read with Section 194J in respect of channel placement fees, uplinking fees, and bandwidth charges, failing to appreciate that payments for use of a "process" constitute royalty under Explanation 6 to Section 9(1)(vi), thereby attracting Section 194J.

  2. Whether the Tribunal erred in directing deletion of the disallowance when the jurisdictional ITAT Mumbai 'L' Bench, in its order dated 28.03.2014 in ADIT-(IT)-2(2), Mumbai Vs Viacom 18 Media Pvt. Ltd., had confirmed that payments for use/right to use of a process are royalty under the Income-tax Act, 1961.

  3. Whether the Tribunal erred in holding that short deduction of tax would not result in disallowance under Section 40(a)(ia), ignoring the Kerala High Court's ruling in CIT-1, Kochi Vs PVS Memorial Hospital Ltd. [2015] 60 com 69 (Kerala).

  4. Whether the Tribunal erred in deleting the disallowance, failing to appreciate that Section 40(a)(ia) is a machinery section (not a charging section), and the expression "tax deductible at source under Chapter XVII-B" must be read as tax deductible under the correct provision of Chapter XVII-B — making deduction under a wrong section equivalent to non-deduction.

Revenue's Argument