Retrospective tax amendments cannot create a withholding obligation for past payments where earlier law required no deduction.

ITAT Delhi held that disallowance under section 40(a)(i) could not be sustained for non-deduction of tax at source on global account coordination cost paid to a non-resident. Although a retrospective amendment may expand substantive taxability, the obligation to withhold tax under section 195 must be tested against the law in force when the payment was made or credited. The 2010 amendment could not retrospectively impose a withholding burden on a payment made in assessment year 2008-09. Accordingly, the statutory basis for disallowance failed and the addition was deleted.

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Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 was justified on account of non-deduction of tax at source from global account coordination cost paid to a non-resident, and whether a retrospective amendment could fasten withholding tax liability for an earlier assessment year.

Analysis: The payment was examined in the context of section 195 and the definition of fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961. The Tribunal accepted the principle that, although a retrospective amendment may enlarge substantive taxability, the obligation to deduct tax at source must be judged on the law prevailing when the payment was made or credited. The later amendment inserted in 2010 could not be used to impose a withholding burden retrospectively for a payment made in assessment year 2008-09. In that view, the statutory basis for invoking section 40(a)(i) did not survive.

Conclusion: The disallowance under section 40(a)(i) was not sustainable and the addition was directed to be deleted.

Ratio Decidendi: A retrospective amendment may operate on the taxability of income, but it cannot retrospectively create a withholding tax obligation for payments already made when the earlier law did not require deduction.

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