2014 (4) TMI 319 - HC - Income Tax

Order u/s 197 of the Act challenged Request to determine lower rate of TDS rejected u/s 194I of the Act - Whether the activity of provision of passive infrastructure by Indus to the mobile operator constitutes renting within the extended definition under Explanation to Section 194-I or whether the activity is service, pure and simple without any element of hiring or letting out of premises Assessee contended that there is no intention to rent or lease the premises or facilities or equipment and what is contemplated by the parties is a service - Held that - The decision in FAQIR CHAND GULATI Versus UPPAL AGENCIES PVT. LTD. 2008 (7) TMI 159 - SUPREME COURT followed - There cannot be any generic observation on the question whether a particular transaction amounts to leasing, or letting out or hiring premises or other properties - Courts endeavor should in all cases be to ascertain the parties operative intention and the mandate of the law, which defines what is rent or amounts to letting out, etc. - Section 194-I through the Explanation does enlarge the scope of what can be termed as traditional concept of letting or renting, by using the expression other arrangement aimed at permitting use of either immovable property (land and buildings) or other properties (plant, equipment, machinery, etc). The Parliamentary intent was clear that transactions - the consideration for which otherwise may not be covered by rent - also ought to be within Section 194-I, by use of the expression other arrangement for the use - Whilst there is no doubt that the intention of the parties was to ensure that the use of technical and specialized equipment maintained by Indus should be resorted to - at the same time, there is no escape from the fact that the infrastructure is given access to, and in that sense, it is given for the use of the mobile operators - The towers in a sense are the neutral platform without which mobile operators cannot operate - If one goes back in time each mobile operator - which is now Indus customer - used to carry out this activity, by necessarily renting premises and installing the same equipment. The rent paid then to the owner, whenever such transactions were leases, were business expenses - Yet leases or such like arrangement had to be resorted to - That situation has remained unchanged - instead of the mobile operator performing the task, it is done exclusively by Indus - The dominant intention in the transactions - between Indus and its customers - is the use of the equipment or plant or machinery - thus, the contention of Indus, that the transaction is not renting at all, is incorrect - The underlying object of the arrangement or agreement (in the MSA) was the use of the machinery, plant or equipment, i.e. the passive infrastructure - That it is necessary to house these equipment in some premises is entirely incidental. The petition is entitled to succeed to the extent that the tax deductions to be made by Indus are to be at the rate directed in Section 194-I (a) for the use of any machinery or plant or equipment at the rate indicated for that provision, i.e. two percent decided in favour of Assessee.

Summary

Issues Involved:
1. Determination of lower rate of tax deduction at source (TDS) under Section 197 of the Income Tax Act.
2. Classification of payments under Section 194-I (rent) vs. Section 194C (contractual services).
3. Applicability of judgments and circulars in determining the nature of the transaction.

Issue-wise Detailed Analysis:

1. Determination of Lower Rate of TDS under Section 197:
The petitioner, Indus, was aggrieved by the order of the Commissioner of Income Tax (CIT) declining its request for a lower rate of TDS. Indus had applied for a lower deduction certificate at 0.5% for the financial year 2013-14 under Section 194C, but the Assessing Officer issued a certificate at 2.5% under Section 194-I. The CIT upheld this decision, leading Indus to file the writ petition.

2. Classification of Payments under Section 194-I vs. Section 194C:
Indus argued that it provided passive infrastructure services to telecom operators, which should be classified under Section 194C as contractual services rather than Section 194-I as rent. Indus contended that the Master Service Agreement (MSA) indicated the provision of technical services rather than renting out premises or equipment.

The CIT, however, held that the payments made to Indus constituted 'rent' under Section 194-I. It was noted that mobile operators were given access to the premises and property, which is the essence of a renting transaction. The CIT emphasized that the definition of 'rent' in Section 194-I is broad and includes arrangements where the site/towers are used by mobile operators.

3. Applicability of Judgments and Circulars:
Indus relied on judgments from the Karnataka High Court and Delhi High Court, which ruled that similar transactions did not involve the transfer of the right to use and were not subject to VAT. The CIT rejected this reliance, stating that the context of those judgments was different and did not pertain to the nature of receivables under Sections 194C or 194-I of the Income Tax Act.

Indus also cited Circular No. 1/2008, which clarified that cold storage services are liable to withholding tax under Section 194C. The CIT distinguished this case, noting that cold storage customers do not have access or control over specific spaces, unlike mobile operators who install equipment on Indus' towers.

Analysis and Reasoning:
The court analyzed the terms of the MSA and the nature of the transaction. It was noted that Indus provided infrastructure and specialized services, and the infrastructure was always controlled by Indus. The mobile operators had the right to install equipment and benefit from specified conditions but did not have possession or control over the premises.

The court referred to the definition of 'rent' in Section 194-I, which includes any payment for the use of land, building, machinery, plant, or equipment. The court concluded that the transaction involved the use of machinery, plant, or equipment, and the use of premises was incidental.

Conclusion:
The court held that the payments made to Indus should be classified under Section 194-I(a) at the rate of 2% for the use of machinery, plant, or equipment. The petition was allowed to this extent, and the revenue's contentions were rejected. The court directed that the benefit be given to Indus accordingly.

Summary:
The court determined that the payments made to Indus for providing passive infrastructure services to telecom operators constituted 'rent' under Section 194-I of the Income Tax Act. The court held that the transaction involved the use of machinery, plant, or equipment, and the use of premises was incidental. Consequently, the TDS rate was set at 2% under Section 194-I(a). The petition was allowed to this extent, and the revenue's contentions were rejected.