2003 (4) TMI 223 - AT - Income Tax

Resident payments for standard telecom connectivity to foreign operators held not FTS/royalty; no s.195 withholding, s.201 demand dropped.

Payments by a resident customer to non-resident telecom operators for standard telephone/telecom connectivity were examined for withholding under s. 195 ... Income - Deemed to accrue or arise in India - default in deducting tax at source on payments to non-resident companies as required under s. 195 - levy of interest under s. 201(1A) - royalty - applicability of s. 9(1)(vi) - liability for tax deduction arises in India under s. 195 - HELD THAT:- In the present case no service except standard telephone services are provided to the appellant such services cannot be regarded as technical or managerial or other type of consultancy services. The authorities below are in great confusion as to what services are utilised by the appellant. It is true that today's telephone infrastructure will involve utilisation of satellites, optical fibre cables and most sophisticated technology and technical services. But these services are rendered by the vendors of the equipment and other engineering consultancy firms to the telecom companies who utilise the same to set up sophisticated telecom infrastructure which would ultimately provide better service to every user. Such involvement of sophisticated equipment and technology does not mean this is made available to the consumer. Neither the equipment nor the technology is known to the common user nor is any right therein transferred to the consumer just because he happens to be a subscriber customer. The fact that the telephone service provider has installed sophisticated equipment in the exchange to ensure quality connectivity to its subscriber does not on that score make it as provision of technical service to the subscriber. The Hon'ble Madras High Court in the Skycells' [2001 (2) TMI 57 - MADRAS HIGH COURT] decision has held that what applies to cellular mobile services is also applicable in fixed telephone service. Hence, the decision applies to the present case. Further, it is an undisputed fact that while uplinking the data from customers premises in India, VSNL offers similar services to the appellant. Such service is not regard as technical services under s. 9(1)(vii) so as to attract the TDS provisions under s. 194J of the Act. Parity of reasoning demands similar treatment even if the services are provided by a private party or a non-resident. Department has no issue on the service provided by VSNL or STPI. It is inexplicable as to how the same becomes an issue when such a service is provided by a private party or a non-resident. Going through the decision of Tribunal Delhi 'C' Bench mentioned supra, we find that when services are provided between the telecom operator and the customer the same would not amount to technical service or royalty. For these reasons we hold that the amount paid cannot be considered as 'fees for technical services' under s. 9(1)(vii) in the present case. Whether DTAA between India and USA and in particular Art. 12(4) of said agreement would render such services taxable in India - The liability under the Act does not arise due to operation of DTAA but the charging provision of the Act. So long as the amount paid is not taxable under the Act, the clause in the DTAA cannot bring the charge. DTAA is a relief giving mechanism and operates as relief against liability in resident country and host country. In this case since there is no domestic liability, on this score itself DTAA would not be applicable and no liability will arise on account of DTAA. It is an accepted position in law that if domestic law exempts certain income or if domestic law is inapplicable in a given circumstances, DTAA would be inapplicable as there is no double taxation. On merits, factually no process has been made available to the appellant, hence, applicability of s. 9(1)(vi) does not arise. Even the decision of the Delhi Tribunal is clear on this issue as mentioned in our findings above. Departmental Representative's extensive reference to the Tribunal decision is not extracted in detail as ex facie we find the decision of the Tribunal supports the contention of the appellant and as much as mentioned by the Tribunal in para 6.24, the case before the Delhi Bench was between the satellite company and the cable operator and whereas in this case it is between the telecom operator and the customer [third type of relation which the Tribunal says is covered by the decision of the Skycell Communications Ltd] [2001 (2) TMI 57 - MADRAS HIGH COURT]. We, therefore, hold that the appellant is not liable even under s. 9(1)(vi). The arguments of cross-objections, etc. are not dealt as on merits we have held in favour of the appellant. Having regard to the facts and circumstances can it be said that the services were utilised by the appellant-company in a business carried on outside India so as to qualify for exception provided under cl. (b) of s. 9(1)(vii) of the Act. Since we have already granted relief on the main section itself the reading of exception is not dealt with as the same would be academic in nature at this juncture. Hence, we propose not to deal with this issue now. The assessee has paid the amount to the non-residents outside India for services rendered outside India. However, since we are not dealing with the appeals of the non-residents, we need not deal with this issue elaborately at this juncture. Hence, the liability for TDS under s. 195 does not arise in the hands of appellant payer. Other arguments on the chargeability of income in India, that the income was earned outside India, receipt of income by the non-resident and the payment thereof by the resident appellant outside India have been left open and not considered here, as we have on merits held in favour of the appellant. Accordingly, the orders passed by the AO under s. 201(1) mentioned above stands cancelled and we hold that there is no liability for TDS against the appellant on the basis of the said order and the liability raised by the AO is deleted. We have found it not expedient to deal with those arguments as we have cancelled the tax/TDS liability against the appellant, hence, the appellant is entitled to consequential relief in respect of interest levied under s. 201(1A). We direct the AO to grant the relief accordingly. In the result all the appeals are allowed. Issues Involved:1. Whether provision of customer-based circuits by foreign companies amounts to provision of technical services within the scope of s. 9(1)(vii) of the Act.2. Whether DTAA between India and USA, particularly art. 12(4), would render such services taxable in India.3. Whether the payment for the above service could be regarded as royalties within the scope of s. 9(1)(vi) of the Act.4. Whether the services were utilized by the appellant-company in a business carried on outside India to qualify for the exception provided under cl. (b) of s. 9(1)(vii) of the Act.5. Whether any liability for tax arises in India u/s 195 of the IT Act.Summary:1. Provision of Customer-Based Circuits as Technical Services (s. 9(1)(vii)):The appellant argued that the telecom services utilized were standard services offered to anyone willing to pay and did not involve the transfer of technology or technical services. The Department contended that the services involved sophisticated technology and technical processes. The Tribunal, referencing the Madras High Court decision in Skycell Communications Ltd. vs. Dy. CIT, concluded that the services provided were standard telecom services and did not constitute technical services u/s 9(1)(vii). Therefore, the payments made could not be considered as fees for technical services.2. DTAA Between India and USA (Art. 12(4)):The appellant argued that the DTAA could not impose a liability not present in domestic law and that the services were neither rendered nor utilized in India. The Tribunal agreed, stating that since no technical services were made available to the appellant, Art. 12(4) of the DTAA did not apply. The Tribunal also noted that the DTAA between India and the USA could not cover services rendered in other countries.3. Payment as Royalties (s. 9(1)(vi)):The Department raised this issue during the proceedings, arguing that the payments could be considered royalties for making available a process. The Tribunal found no evidence that any process was made available to the appellant and held that the payments could not be considered royalties u/s 9(1)(vi).4. Utilization of Services Outside India (s. 9(1)(vii) Exception):The Tribunal did not address this issue in detail, as it had already granted relief on the main section, making further discussion academic.5. Liability for Tax Deduction u/s 195:The Tribunal concluded that since the payments were not income accruing in India under s. 9(1)(vii), 9(1)(vi), or the DTAA, no liability for TDS u/s 195 arose for the appellant.Conclusion:The Tribunal canceled the orders passed by the AO u/s 201(1) and held that there was no liability for TDS against the appellant. Consequently, the interest levied u/s 201(1A) was also canceled, and the appeals were allowed.