2017 (2) TMI 587 - AT - Income Tax

Tribunal rules no TDS for connectivity charges; retrospective amendment not applicable.

The tribunal held that the assessee was not liable to deduct TDS under section 194J, as the payments made were for connectivity charges and did not ... Tax Deduction at Source - Assessee in default under section 201(1) - Royalty and Fees for Technical Services - Use or right to use equipment - Retrospective amendment and its effect on TDS liability - Distinction between contract payments and service fees - Lex non cogit ad impossibiliaTax Deduction at Source - Royalty and Fees for Technical Services - Use or right to use equipment - Retrospective amendment and its effect on TDS liability - Distinction between contract payments and service fees - Characterisation of payments to the telecom operator for SMS connectivity - whether tax was required to be deducted under section 194J as 'royalty'/'fees for technical services' or correctly under section 194C as contract/works payment, and whether the assessee is an assessee in default under section 201(1). - HELD THAT: - The Tribunal found on the facts that the payments were for standard connectivity services enabling transmission of bulk SMS and did not confer any access, control, proprietary information, transfer of equipment use, or exclusive/process rights to the assessee. The assessee used its own software and systems to prepare messages and merely connected to the telecom operator's system; there was no leasing or 'use or right to use' of equipment. Consequently, the payments fall within the character of contract/connectivity charges properly subject to deduction under section 194C rather than being 'royalty' or fees for technical services under section 194J. The Tribunal also held that retrospective amendments introduced later (Finance Act, 2012 with retrospective effect) cannot be applied to impose a prior TDS obligation on the payer for earlier payments; the maxim lex non cogit ad impossibilia was applied to reject liability to deduct TDS in the absence of a statutory provision at the time of payment. Reliance on contrary jurisprudence was considered, and earlier decisions holding that retrospective amendments do not cast prior TDS obligations were noted. On these bases the assessee was not an assessee in default under section 201(1), and consequent interest under section 201(1A) became infructuous. The same reasoning was applied mutatis mutandis to the assessment year 2012-13. [Paras 7, 8, 9]Order of CIT(A) set aside; assessee held not to be in default for failure to deduct TDS as royalty/fees and TDS deduction under section 194C was correct; interest under section 201(1A) stands infructuous; same result for 2012-13.Final Conclusion: Both appeals of the assessee are partly allowed: the Tribunal holds that connectivity payments to the telecom operator are contract/connectivity charges properly subject to TDS under section 194C and not under section 194J; accordingly the assessee is not an assessee in default under section 201(1) and interest under section 201(1A) is rendered infructuous, the decision applying similarly to assessment year 2012-13. Issues Involved:1. Confirmation of default under sections 201(1) and 201(1A) of the Income Tax Act, 1961.2. Applicability of section 194C versus section 194J for tax deduction.3. Impact of retrospective amendments under the Finance Act, 2012.4. Nature of payments made and their classification as royalty or fees for technical services.5. Relevance of Explanation 5 to section 9(1)(vi) and judicial precedents.6. Consistency in treatment of similar transactions by the Income Tax Department.7. Requirement of demonstrating specific revenue loss for passing orders under section 201.Detailed Analysis:1. Confirmation of Default under Sections 201(1) and 201(1A):The learned CIT(A) confirmed the default under sections 201(1) and 201(1A) without considering the assessee's detailed submissions. The assessee argued that the nature of transactions was not properly appreciated, leading to an erroneous confirmation of default.2. Applicability of Section 194C versus Section 194J:The CIT(A) considered the assessee to be in default for deducting tax under section 194C instead of section 194J. The assessee contended that tax was properly deducted under section 194C, as the payments did not fall under the purview of section 194J. The CIT(A) failed to appreciate the nature of the transactions and the proper application of the relevant sections.3. Impact of Retrospective Amendments under the Finance Act, 2012:The CIT(A) invoked amendments under the Finance Act, 2012, to hold the assessee in default. The assessee argued that for orders under section 201, the law as on the date of payment should be considered, and subsequent amendments, whether retrospective or not, should only affect the chargeability in the recipient's hands, not create retrospective liability under section 201.4. Nature of Payments Made and Their Classification as Royalty or Fees for Technical Services:The CIT(A) failed to appreciate that the payments made were not in the nature of royalty or fees for technical services. The payments were not covered under the amended definition of royalty. The CIT(A) did not distinguish between consideration for the transfer of rights in respect of a process and consideration for a facility/service provided by the recipient without any transfer of rights.5. Relevance of Explanation 5 to Section 9(1)(vi) and Judicial Precedents:The CIT(A) relied on Explanation 5 to section 9(1)(vi) and the decision of the Madras High Court in the case of Verizon Communications. The assessee argued that these decisions and the explanation were inapplicable or distinguishable based on the nature of the transactions. The CIT(A) did not properly analyze the applicability of these precedents.6. Consistency in Treatment of Similar Transactions by the Income Tax Department:The CIT(A) failed to appreciate that the Income Tax Department itself had accepted that similar transactions were covered under section 194C and not section 194J. The orders under section 201 were deemed unwarranted as the department had previously treated similar payments as contract payments liable to tax deduction under section 194C.7. Requirement of Demonstrating Specific Revenue Loss for Passing Orders under Section 201:The CIT(A) did not demonstrate any specific revenue loss, which is a precondition for passing orders under section 201. The absence of demonstrated revenue loss invalidated the orders under section 201.Conclusion:The tribunal held that the assessee was not liable to deduct TDS under section 194J, as the payments made to Tata Tele Services Ltd. were for connectivity charges and did not involve the use or transfer of any equipment or process. The retrospective amendment brought by the Finance Act, 2012, could not be applied to create a liability for the assessee. The tribunal set aside the order of the CIT(A), allowing the grounds raised by the assessee. Consequently, the interest under section 201(1A) became infructuous. The same reasoning applied to the assessment year 2012-13, and both appeals of the assessee were partly allowed.