|CORAM:||H. S. Sidhu (JM), O. P. Kant (AM)|
|SECTION(S):||40(a)(i), 9(1)(i), 9(1)(vi), 9(1)(vii)|
|GENRE:||Domestic Tax, International Tax|
|CATCH WORDS:||Accrual of income, Fees for technical services, royalty, TDS disallowance|
|COUNSEL:||Ajay Vohra, Gaurav Jain|
|DATE:||January 17, 2017 (Date of pronouncement)|
|DATE:||January 30, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 9(1)(i)/ 9(1)(vi)/ 9(1)(vii)/ 40(a)(i): Law on whether payment by the assessee to non-resident parties for “call transmission services through dedicated bandwidth” is assessable as income accruing in India, royalty or fees for technical services and whether a disallowance can be made for failure to deduct TDS explained|
(i) In the instant case also, the undersea cable for providing dedicated bandwidth to the assessee was installed beyond the territory of India and no operations were carried out by the non-resident party M/s Kick Communication in India. It was responsible for restoring connectivity and Managing faults in connectivity etc in respect of data transmitted through undersea cable only. Similarly, the operations carried out by M/s. IGTL Solutions are also in USA and not in India. Since operations by both the non-resident parties are carried out beyond the territory of India, we thus hold that section 9(1)(i) is of the Act is not attracted in case of above two non-resident parties.
(ii) The Commissioner of Income-tax (Appeals) has referred to consideration for use of the process of transmission of data as royalty. In our opinion, in the Explanation-2, the process referred, is the patentable process and consideration received for allowing use of such patentable process for manufacturing or any other use has been termed as royalty. For earning royalty, the person should have exclusive rights in respect of the process embedded. But in the case of the assessee, we do not find any mention in the agreement for the use of any process, which is of a patentable nature or under exclusive rights of the non-resident party. Further, we also find from the agreements with the Kick Communication that no information concerning technical, industrial, commercial or scientific knowledge, experience or a skill has been imparted to the assessee by the non-resident party. All the services mentioned in the service level agreement are to effect the service of transmission of data and its effective management so as to ensure 99.50% service availability guarantee as agreed between the parties. In our opinion the clause(iii) and (iv) of Explanation-2 are not applicable over the facts of the instant case.
(iii) In the case of instant assessee, the control of equipment was with the non-resident parties and they have not leased the equipments, i.e. the undersea cable etc. to the assessee. The equipments were owned and used by the non-resident parties only and therefore it cannot be said that the consideration paid was for use of equipment by the assessee. Similarly the non-resident parties have not provided use of any process to the assessee, which are of patentable nature having exclusive ownership rights. The assessee was not concerned with any of the process involved in transmission or connectivity of call data. The only concern of the assessee was transmission of call data beyond the boundaries of India to the person in USA to whom call was made. Identical issue came up before the Delhi bench of Tribunal in the case of Bharti Airtel Ltd. vs. Income Tax Officer (supra), wherein also the issue whether payment towards call interconnectivity charges for call transmission on foreign network was amounted to royalty or not.
(iv) Further the assessee in support of the proposition that amendment under section 9(1)(vi) of the Act by finance Act 2012 has no bearing on the provisions of DTAA has relied on the decision of the Hon’ble Delhi High Court in the case of DIT Vs. New Sky Satellite BV, in ITA 473/2012. In the instant case also the assessment year involved is 2002-2003, and thus the Explanation-5 and 6 and Memorandum of Explanation cannot be brought into action as there has not been any corresponding change in the definition of the term royalty in the DTAA between India and the USA. Accordingly, we are of the opinion that under the DTAA, the restricted meaning of the royalty shall continue to operate despite the amendment in law. As far as the assessee is concerned, in case of difference between provisions of the Act and an agreement under section 90 i.e. (DTAA), the provisions of the agreement shall prevail over the provisions of the Act.
(v) In view of our discussion above, we hold that the payments made by the assessee are not in the nature of royalty either under the domestic law or relevant DTAA.
(vi) Further, in the case of the instant assessee, it has been argued by the learned counsel that even if it is assumed that payment was in the nature of royalty after retrospective amendment in the Act, the assessee cannot be held in default for not deducting tax on those payments. In support of the contention, learned counsel has relied on the decision of the Delhi bench of Tribunal in the case of Business India Televisions International Limited Vs. ACIT, 11 SOT 486. We agree with the contention of the argument of learned counsel in view of the judicial decisions relied upon. The obligation under section 195 of the Act to deduct tax is at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or any other mode, whichever is earlier. Therefore, it is relevant to see the obligation of the payer at the time of credit or actual payment and any subsequent amendment through retrospective effect, cannot create any obligation upon the payer which did not exist at the time of crediting or actual payment of the sum.
(vii) Thus, we hold that no disallowance could have been made under section 40(a)(i) of the Act for non-deduction of tax on the payments to non-resident parties, namely, M/s Kick Communication and M/s IGTL Solutions. Accordingly, the ground No. 1 of the appeal is allowed.
(viii) Since in the call connectivity and transmission from end of the Indian Territory at Mumbai to the termination of call in USA, no technical knowledge has been made available to the assessee, respectfully following the decision of the Tribunal in the case of Bharti Airtel Ltd Vs. ITO (supra), we hold that payment for the services of call transmission through dedicated bandwidth provided by the non-resident parties to the assessee, cannot be termed as Fee for Technical services under the treaty also, in the hands of the recipients.