Royalty taxation for internet line charges cannot rely on later retrospective amendment; TDS disallowance was deleted.

Internet private line charges paid to a non-resident service provider were treated as not taxable as royalty on the payment dates, because the expanded definition of royalty in section 9(1)(vi) had not yet come into force. Tax deduction at source under section 195 could not be assessed by reference to a later retrospective amendment, and the principle that a person cannot be required to do the impossible applied. On that basis, disallowance under section 40(a)(ia) was held unsustainable and the addition was directed to be deleted in favour of the assessee.

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Issues: Whether payments made for internet private line charges to a non-resident service provider were taxable as royalty so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961 and consequent disallowance under section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The payment was made for services rendered through equipment outside India and, on the dates of payment, the definition of royalty in section 9(1)(vi) of the Income-tax Act, 1961 had not yet been expanded by the later retrospective amendment. The liability to deduct tax under section 195 could not be tested by an amendment that was not in the statute at the relevant time. The principle that a person cannot be expected to do the impossible applied, and the retrospective clarification could not justify the disallowance for failure to deduct tax at source.

Conclusion: The disallowance under section 40(a)(ia) of the Income-tax Act, 1961 was not sustainable and the addition was directed to be deleted, in favour of the assessee.

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