2008 (3) TMI 327 - HC - Income Tax

Payments to non-resident for internet bandwidth are purchase of capacity, not technical services; Section 9(1)(vii) inapplicable

HC dismissed the appeal, upholding the Tribunal's finding that payments to a non-resident supplier for internet bandwidth constituted a simple purchase of ... Deduction of tax at source from payment made to non-resident - invoked the provisions of section 9(1) (i) and section 9(1)(vii) - liable to deduct tax at source from the payments made to the US party - HELD THAT:- The Tribunal considered the agreement that had been entered into by the assessee with Teleglobe and came to the conclusion that there was no privity of contract between the customers of the assessee and Teleglobe. In fact, the assessee was merely paying for an internet bandwidth to Teleglobe and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by Teleglobe to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from Teleglobe Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by Teleglobe to the assessee and, therefore, the provisions of section 9(1) (vii) of the Act did not apply. We find that the Tribunal has rightly dismissed the appeal after taking into consideration the agreement between the assessee and Teleglobe and nature of services provided by Teleglobe to the assessee. It was a simple case of payment for the provision a bandwidth. No technical services were rendered by Teleglobe to the assessee. The appeal is, accordingly dismissed. Issues:Interpretation of sections 9(1)(i) and 9(1)(vii) of the Income-tax Act, 1961 regarding tax deduction on payments made to a US party for internet services provided to Indian subscribers.Analysis:1. The Revenue challenged the order of the Income Tax Appellate Tribunal concerning the assessment year 2001-02, arguing that tax should have been deducted at the source from payments made to a US party for internet services provided to Indian subscribers.2. The Assessing Officer relied on sections 9(1)(i) and 9(1)(vii) of the Income-tax Act, 1961 to assert the tax liability. However, the Commissioner of Income-tax (Appeals) allowed the assessee's appeal, stating that the assessee was merely providing internet services and not required to deduct tax at source. The Revenue appealed to the Tribunal, focusing on the applicability of section 9(1)(vii) as section 9(1)(i) was not pressed.3. The Tribunal analyzed the agreement between the assessee and the US party, Teleglobe, and concluded that there was no privity of contract between Teleglobe and the customers of the assessee. It determined that the payments were for internet bandwidth, not technical services, as Teleglobe did not provide such services to the assessee. Therefore, section 9(1)(vii) did not apply.4. The Tribunal's decision was based on the nature of the agreement and services provided by Teleglobe, emphasizing that no technical services were rendered. The Tribunal dismissed the appeal, affirming that the payments were for the provision of bandwidth, not technical services.5. The High Court upheld the Tribunal's decision, stating that after reviewing the material on record, no substantial question arose. Consequently, the appeal was dismissed, affirming that the payments made were for internet bandwidth and not subject to tax deduction at source.This comprehensive analysis highlights the key legal interpretations and conclusions drawn by the Tribunal and the High Court regarding the tax liability on payments made for internet services provided to Indian subscribers.