2017 (2) TMI 587 - AT - Income Tax

TDS u/s 194C OR 194J - payment as SMS and short code charges - assessee in default u/s 201(1) - TDS on connectivity charges - Held that - It is a kind of a standard connectivity facility which has been provided by the Telecom operator, nothing else. The agreement is more in the nature of works contract with the Telecom Operator for which the assessee has rightly deducted the TDS under section 194C. Even, the assessee from its customers, like Income-tax department for providing such services has received the payment which has been subjected to TDS under section 194C. Thus, it cannot be held that the assessee is making any payment for use or right to use any equipment. Further, the concept of 'use' or 'right to use any equipment' alludes to the concept of 'leasing', which here in this case admittedly is not there. Much emphasis has been laid by the ld DR as well as by the CIT (A) that, it is a kind of a 'process' and, therefore, in view of Explanation 6 brought with retrospective effect by the Finance Act, 2012 whereby the 'process' includes transmission by satellite, cable, optic fiber or by any other similar technology whether or not such process is not secret. Even if such a contention of the Department is to be accepted, then whether at the time of making the payment where no such amendment was brought in the statute, can assessee be accepted to deduct the TDS? Here, the maxim of lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has-been upheld by in catena of decisions including the ITAT Mumbai Benches in the case of Channel Guide India Ltd, v. Asstt. CIT 2012 (9) TMI 95 - ITAT MUMBAI wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, we hold that assessee was not liable to deduct TDS by treating the payment in the nature of 'Royalty' in terms of section 194J or in terms of retrospective amendment brought from subsequent date. Accordingly, assessee cannot be treated as assessee in default within section 201(1). - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of default under sections 201(1) and 201(1A) of the Income Tax Act, 1961.
2. Applicability of section 194C versus section 194J for tax deduction.
3. Impact of retrospective amendments under the Finance Act, 2012.
4. Nature of payments made and their classification as royalty or fees for technical services.
5. Relevance of Explanation 5 to section 9(1)(vi) and judicial precedents.
6. Consistency in treatment of similar transactions by the Income Tax Department.
7. Requirement of demonstrating specific revenue loss for passing orders under section 201.

Detailed Analysis:

1. Confirmation of Default under Sections 201(1) and 201(1A):
The learned CIT(A) confirmed the default under sections 201(1) and 201(1A) without considering the assessee's detailed submissions. The assessee argued that the nature of transactions was not properly appreciated, leading to an erroneous confirmation of default.

2. Applicability of Section 194C versus Section 194J:
The CIT(A) considered the assessee to be in default for deducting tax under section 194C instead of section 194J. The assessee contended that tax was properly deducted under section 194C, as the payments did not fall under the purview of section 194J. The CIT(A) failed to appreciate the nature of the transactions and the proper application of the relevant sections.

3. Impact of Retrospective Amendments under the Finance Act, 2012:
The CIT(A) invoked amendments under the Finance Act, 2012, to hold the assessee in default. The assessee argued that for orders under section 201, the law as on the date of payment should be considered, and subsequent amendments, whether retrospective or not, should only affect the chargeability in the recipient's hands, not create retrospective liability under section 201.

4. Nature of Payments Made and Their Classification as Royalty or Fees for Technical Services:
The CIT(A) failed to appreciate that the payments made were not in the nature of royalty or fees for technical services. The payments were not covered under the amended definition of royalty. The CIT(A) did not distinguish between consideration for the transfer of rights in respect of a process and consideration for a facility/service provided by the recipient without any transfer of rights.

5. Relevance of Explanation 5 to Section 9(1)(vi) and Judicial Precedents:
The CIT(A) relied on Explanation 5 to section 9(1)(vi) and the decision of the Madras High Court in the case of Verizon Communications. The assessee argued that these decisions and the explanation were inapplicable or distinguishable based on the nature of the transactions. The CIT(A) did not properly analyze the applicability of these precedents.

6. Consistency in Treatment of Similar Transactions by the Income Tax Department:
The CIT(A) failed to appreciate that the Income Tax Department itself had accepted that similar transactions were covered under section 194C and not section 194J. The orders under section 201 were deemed unwarranted as the department had previously treated similar payments as contract payments liable to tax deduction under section 194C.

7. Requirement of Demonstrating Specific Revenue Loss for Passing Orders under Section 201:
The CIT(A) did not demonstrate any specific revenue loss, which is a precondition for passing orders under section 201. The absence of demonstrated revenue loss invalidated the orders under section 201.

Conclusion:
The tribunal held that the assessee was not liable to deduct TDS under section 194J, as the payments made to Tata Tele Services Ltd. were for connectivity charges and did not involve the use or transfer of any equipment or process. The retrospective amendment brought by the Finance Act, 2012, could not be applied to create a liability for the assessee. The tribunal set aside the order of the CIT(A), allowing the grounds raised by the assessee. Consequently, the interest under section 201(1A) became infructuous. The same reasoning applied to the assessment year 2012-13, and both appeals of the assessee were partly allowed.