Withholding tax on telecom charges and software depreciation: non-taxable communication services escaped disallowance, and limited software licence qualified for higher depreciation.

Communication charges paid to a non-resident telecom provider were not chargeable to tax in India because the interconnection and automated communication services involved no human intervention and did not constitute fees for technical services under section 9(1)(vii) or Article 12(4)(b) of the Indo-US DTAA. As section 195 applies only to sums chargeable to tax, no tax was required to be withheld and disallowance under section 40(a)(i) was not sustainable. Software acquired under a limited user licence was treated as part of the computer system, not as a separately exploitable intangible asset, so depreciation at 60% was allowable. The Revenue's challenge failed and the appellate relief was sustained.

---

---

Issues: (i) Whether communication charges paid to a non-resident telecom provider were liable to disallowance under section 40(a)(i) for failure to deduct tax at source, and whether such payments constituted fees for technical services under domestic law and the Indo-US DTAA; (ii) Whether depreciation on software purchased under a limited user licence was allowable at 60% or was restricted as an intangible asset.

Issue (i): Whether communication charges paid to a non-resident telecom provider were liable to disallowance under section 40(a)(i) for failure to deduct tax at source, and whether such payments constituted fees for technical services under domestic law and the Indo-US DTAA.

Analysis: The payment for interconnection and communication facilities was held not to contain any taxable element in India. The relevant enquiry was whether the sum was chargeable to tax, because the obligation to deduct tax at source arises only in respect of sums so chargeable. The services were found to be automated communication services without human intervention and did not amount to technical services under section 9(1)(vii). They also did not satisfy the treaty test under Article 12(4)(b) because no technical knowledge, experience, skill, know-how, or process was made available to the assessee. On that basis, section 195 was not attracted and the resulting disallowance under section 40(a)(i) was unsustainable.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether depreciation on software purchased under a limited user licence was allowable at 60% or was restricted as an intangible asset.

Analysis: The software was treated as a limited user licence and not as an intangible asset capable of separate commercial exploitation. It was regarded as part of the computer system, and the earlier year's view in the assessee's own case had already recognised higher depreciation on the same footing. No distinguishing facts were shown to depart from that approach.

Conclusion: The issue was decided in favour of the assessee, and depreciation at 60% was upheld.

Final Conclusion: The Revenue's challenge failed on both disputed additions, and the relief granted by the first appellate authority was sustained in full.

Ratio Decidendi: Tax deduction at source is not required under section 195 unless the payment is chargeable to tax in India, and automated interconnection or communication charges that do not make available technical knowledge are not fees for technical services; a limited user software licence forming part of the computer system may qualify for higher depreciation as computer equipment rather than as an intangible asset.

---