2017 (8) TMI 740 - AT - Income Tax

Tribunal rules on Sections 194J and 194I applicability, service tax exemption

Alok Industries Limited Versus Dy. CIT, (TDS) 1 (1), Mumbai

The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s orders on the issues of applicability of Sections 194J and 194I to the payments ... TDS u/s. 194J - non deduction of tds on payments made to M/s. Avery Dennisson Hong Kong BV - payment made is for technical services or software, hence, royalty - payment made for Purchase of thermal transfer printers, Purchase of barcodes and Software charges for onsite installation and operator training - assessee in default u/s. 201(1) and 201(1A) - Held that:- The payments have been made towards purchase of thermal transfer printer which is nothing but capital goods. Therefore, such payment cannot be treated as fees for technical service/royalty so as to bring them within the sweep of section 194J. The barcode stickers are nothing but stationery items purchased by the assessee. Therefore, payment made for purchase of barcode cannot be treated as fees for technical services or royalty, so as to apply the provisions of section 194J. Payments made towards software charges, onsite installation and operator training - as far as software charges are concerned, it is required to be seen whether the software supplied are in the nature of copy right or copy righted article. The afore-said factual aspect has not been examined by any departmental authorities. To put it in proper perspective, the departmental authorities have failed to properly examine the nature of payments. While A.O. has treated the entire payment as internet charges paid to M/s. Sify Ltd. The ld. CIT(A), though, has called for breakup of payment made, however, he has wrongly assumed that entire payment made to M/s. Avery Dennison was for barcode. In our view, without properly examining the facts, A.O. and CIT(A) have wrongly concluded that payment made is for technical services or software, hence, royalty. Therefore, there was no liability on the assessee to deduct tax u/s. 194J. - Decided in favour of assessee TDS u/s 194I or 194J - payment made by the assessee to M/s. Sify Ltd. towards internet charges - effect of amendment - Held that:- As could be seen, in a number of judicial precedents, it has been held that payment made towards broadband/lease line charges is not in the nature of royalty so as to attract the provisions of section 194J. Since, the services rendered are not in the nature of technical service as envisaged u/s. 194J, the ld. CIT(A) has attempted to rope in the payment u/s. 194I by referring to the definition of ‘process’ as provided under Explanation (6) to section 9(1)(vi). However, the said amendment was made by Finance Act, 2012 w.r.e.f. 01.6.1976. Thus, as per existing provision, when the assessee made the payment there was no liability to deduct tax at source by treating it as royalty. The amendment made with retrospective effect cannot fasten liability on the assessee. That being the case assessee cannot be treated as assessee in default. - Decided in favour of assessee Payment made to Tracom Network Ltd. for internet/lease line charges do not attract provision of section 194J. - Decided in favour of assessee Applicability of TDS provision to service tax component in the payment made to M/s. Sify Ltd. - Held that:- Having perused the CBDT Circular no. 1/2014 dated 13.1.2014 saying service tax cannot be subject to TDS provision, we find merit in the submissions of the assessee. In any case of the matter, while deciding ground nos. 5 to 7, we have held that the payment made to M/s. Sify Ltd. do not attract the provisions of section 194J. In that view of the matter, there is no liability on the assessee to deduct tax under the said provision. Therefore, the demand raised by the A.O. u/s. 201(1) and 201(1A) have to be deleted. - Decided in favour of assessee Issues Involved:1. Applicability of Section 194J for payments made to M/s. Avery Dennisson Hong Kong BV.2. Applicability of Section 194J for payments made to M/s. Sify Ltd. for internet broadband charges.3. Applicability of Section 194I for payments made to M/s. Sify Ltd. for internet broadband charges.4. Applicability of Section 194J for payments made to Tracom Network Ltd.5. Applicability of TDS provisions to the service tax component in the payment made to M/s. Sify Ltd.Issue-wise Detailed Analysis:1. Applicability of Section 194J for payments made to M/s. Avery Dennisson Hong Kong BV:The assessee challenged the CIT(A)'s decision confirming the demand raised under Sections 201(1) and 201(1A) for non-deduction of tax at source under Section 194J on payments made to M/s. Avery Dennisson Hong Kong BV. The CIT(A) held that the barcode is an intangible property and thus payments made for its purchase are in the nature of royalty, requiring TDS under Section 194J. However, the Tribunal found that the payments were for various categories, including thermal transfer printers (capital goods), barcodes (stationery), and software charges. It concluded that payments for thermal transfer printers and barcodes do not attract Section 194J as they are not technical services or royalty. The Tribunal remanded the issue of software charges for further examination to determine if they are for copyrighted software or copyrighted articles.2. Applicability of Section 194J for payments made to M/s. Sify Ltd. for internet broadband charges:The assessee contended that payments made to M/s. Sify Ltd. for internet/broadband connectivity do not involve technical services and thus do not attract Section 194J. The CIT(A) upheld the A.O.'s view that such payments are for technical services. However, the Tribunal, relying on judicial precedents, held that payments for broadband/lease line charges are not in the nature of royalty or technical services, thus not attracting Section 194J. The Tribunal also noted that retrospective amendments cannot impose liability on the assessee.3. Applicability of Section 194I for payments made to M/s. Sify Ltd. for internet broadband charges:The CIT(A) alternatively held that payments to M/s. Sify Ltd. could be considered rent under Section 194I. The Tribunal disagreed, citing judicial precedents that broadband/lease line facilities do not constitute rent for equipment, plant, or machinery under Section 194I. Thus, the Tribunal set aside the CIT(A)'s order on this issue.4. Applicability of Section 194J for payments made to Tracom Network Ltd.:The assessee argued that payments to Tracom Network Ltd. for internet/lease line charges are not royalty and thus do not attract Section 194J. The Tribunal agreed, noting that the department did not dispute the nature of the payments. The Tribunal held that, similar to the payments made to M/s. Sify Ltd., these payments do not attract Section 194J.5. Applicability of TDS provisions to the service tax component in the payment made to M/s. Sify Ltd.:The assessee contended that the service tax component in payments to M/s. Sify Ltd. should not be subject to TDS provisions. The Tribunal, referring to CBDT Circular No. 1/2014, agreed that service tax should not be subject to TDS. Furthermore, since the Tribunal held that the payments to M/s. Sify Ltd. do not attract Section 194J, there was no liability for TDS on the service tax component.Conclusion:The Tribunal allowed the assessee's appeal, setting aside the CIT(A)'s orders on the issues of applicability of Sections 194J and 194I to the payments made to M/s. Avery Dennisson Hong Kong BV, M/s. Sify Ltd., and Tracom Network Ltd. The Tribunal also ruled that the service tax component in the payments to M/s. Sify Ltd. should not be subject to TDS.