Subsequent circulars won’t create TDS obligation if circular applicable at time of payment exempted it

Where circular effective at relevant time exonerates an assessee from TDS obligation on payment to non-resident, subsequent circular would not create such an obligation retrospectively

In the instant case the assessee had paid commission to foreign agents on which it did not deduct tax in view of Circular Nos. 23 of 1969, 163 of 1975 and 786 of 2000. The revenue made disallowance of expenditure under section 40(a)(i) holding that it was mandatory for assessee to deduct tax as Circular No. 7 of 2009 had superseded earlier circulars.

The High Court held in favour of assessee as under:

1) The assessee’s assessment would be governed by Circular, which was operative at the relevant time (i.e., assessment year 2007-08) and which did not oblige the assessee to deduct tax at source;

2) The assessee was not entitled to deduct TDS. The department could not have taken different stand in subsequent years or assessment year 2007-08, when the circulars were operative and were not withdrawn;

3) Circular No. 7 of 2009, dated 22-10-2009 withdrawing earlier circulars became operative only from 22-10-2009;

4) The circulars in the relevant year were binding upon the department and assessee could challenge the affect of the Circular but that the Assessing Officer did not have any right to ignore the circulars and to disallow non-deduction of tax at source under sections 195 and 40(a)(i);

5) Thus, as assessment was governed by that circular which was operative at relevant time assessee was under no obligation to deduct tax at source – CIT v. Model Exims Kanpur (2013) 38 taxmann.com 319 (Allahabad)