2013 (10) TMI 769 - AT - Income Tax

Whether the remittances made by the appellant company to the foreign parties would fall within the purview of sec. 195(1) which requires deduction of tax at source - Bandwidth is bought and sold to consumers and it acts as a conduit only Held that - There are no equipments installed in its premises and the contract entered with the foreign parties is only for the services. Mere use of equipment in providing bandwidth services would not amount to transfer of right to use. As a matter of fact there are no goods involved in the transaction and the payments are made only for the use of services - Royalty means the payment of any kind received as a consideration for the use of or the right to use, any copy right of literary artistic or scientific work but, does not include the words use or right to use, industrial, commercial or scientific equipment. In the appellant s case there is no right to use equipment. Therefore, the payments made do not fall under royalty . Transactions in respect of which the impugned payments were made was purely on account of services and there is no transfer of right to use the goods - Assessing Officer was not justified in treating the payment as royalty and invoking the provisions of sec. 195 Reliance has been placed upon the judgment in the case of Hon ble Bombay High Court in CIT Vs. Godavari Devi Saraf Smt 1977 (9) TMI 24 - BOMBAY High Court Decided against the Revenue.

Summary

Issues Involved:
1. Deletion of addition for invoices raised but not shown as income.
2. Deletion of disallowance under Section 40(a)(ia) of the Income-tax Act, 1961, for networking costs due to non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Deletion of Addition for Invoices Raised but Not Shown as Income:

The Revenue contested the order of the Commissioner of Income Tax (Appeals)-V, Chennai, dated 25.1.2013, which deleted the addition of Rs. 11,10,17,000/- made by the Assessing Officer (AO) for invoices raised but not shown as income. The assessee's counsel pointed out that the CIT(A) had followed the decision of the Tribunal in the assessee's own case for the assessment year 2003-04, where it was held that the revenue from software and consultancy services was recognized on delivery of goods/services. The AO had initially added Rs. 39,68,208 to the income, arguing that in the mercantile system of accounting, receipts on sales need to be recognized once an invoice is raised. The CIT(A) deleted this addition, observing that the assessee followed the 'project completion method' as per AS 9, and the deferred income was duly accounted for in the next assessment year. The Tribunal upheld the CIT(A)'s decision, noting that the fact situation was similar for the impugned assessment year, thus dismissing Ground No.2 of the Revenue.

2. Deletion of Disallowance under Section 40(a)(ia) for Networking Costs:

The Revenue's grievance was against the CIT(A)'s deletion of the disallowance made under Section 40(a)(ia) of the Income-tax Act, 1961, for networking costs due to non-deduction of tax at source. The assessee's counsel submitted that this issue was also covered in favor of the assessee by the Tribunal's decision in the assessee's own case for earlier years. The AO had disallowed the networking costs, arguing that they warranted deduction of tax at source. The Tribunal, in its earlier decision for the assessment year 2002-03, had held that payments for connectivity services do not fall under the category of 'royalty' or 'fees for technical services' and thus are not subject to TDS provisions. The Tribunal reiterated that the payments in question could not be subjected to TDS provisions, thereby upholding the CIT(A)'s decision and dismissing Ground No.3 of the Revenue.

Conclusion:

The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on both issues. The order was pronounced in the Court on Friday, the 4th of October, 2013, at Chennai.