2017 (8) TMI 714 - AT - Income Tax

TDS u/s 194J OR 194I - Applicability of Tax Deduction at Source on payments towards internet & communication charges - Held that - We find that the internet and communication charges are not liable for deduction of any tax at source, as the same are merely in the nature of payments which cannot be characterized as having been made for availing of any special, exclusive or customized services rendered to the user or consumer who may approach the service provider for such service. We find that the issue involved in the present case is squarely covered by the Judgment of the Hon ble Supreme Court in the case of CIT Vs. Kotak Securities Ltd. (2016 (3) TMI 1026 - SUPREME COURT). We therefore set aside the order of the CIT(A) holding the assessee as being in default u/ss. 201(1)/201(1A) for failing to deduct tax at source on payments made towards internet and communication charges. The Ground of appeal No. 1 raised by the assessee before us is allowed. Liability to deduct tax at source on payments towards lease line charges - Held that - VSAT and lease line charges paid by the assessee to stock exchange are merely in the nature of reimbursement of the charges paid/payable by the stock exchange to the department of the telecommunication, and thus in the absence of any element of income involved in the said payments, the issue as regards deduction of tax at source on the same does not arise at all. We are of the considered view that in the backdrop of the aforesaid judgment of the Hon ble Jurisdictional High Court in Income Tax Commissioner, Mumbai City-4 Vs. Angel Capital & Debit Market Ltd. 2014 (5) TMI 584 - BOMBAY HIGH COURT the order of the CIT(A) treating the assessee as being in default u/s. 201(1)/201(1A) in respect of failure to deduct tax at source as regards the payments made towards lease line charges, cannot be sustained, and is thus set aside Assessee appeal allowed.

Summary

Issues Involved:
1. Applicability of Tax Deduction at Source (TDS) on payments towards internet and communication charges.
2. Applicability of TDS on payments towards lease line charges.

Issue-wise Detailed Analysis:

1. Applicability of TDS on Payments Towards Internet and Communication Charges:

The assessee contested the order of the CIT(A) that payments towards internet and communication charges fall within the definition of 'Royalty' under Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961, and are subject to TDS under Section 194J. The assessee argued that these payments are for standard facilities and should not be subject to TDS, citing various case laws such as Hero MotoCorp Ltd. v. ACIT and ACIT v. Twenty First Century Shares & Securities Ltd. The assessee also highlighted that tax was already deducted under Section 194J/194C for communication charges, except for VSAT connectivity charges. The CIT(A) held that payments towards internet and communication charges are covered under the definition of 'Royalty' and are subject to TDS under Section 194J. Alternatively, the CIT(A) suggested that these payments might fall under Section 194-I.

Upon appeal, the Tribunal referenced the Supreme Court's decision in CIT v. Kotak Securities Ltd., which clarified that payments for internet and communication charges are not for specialized, exclusive, or customized services but for facilities available to all. Therefore, such payments do not qualify as 'technical services' under Section 194J. Consequently, the Tribunal set aside the CIT(A)'s order and ruled that the assessee was not liable for TDS on internet and communication charges.

2. Applicability of TDS on Payments Towards Lease Line Charges:

The assessee argued that lease line charges paid to the internet service provider for faster internet access were not for the use of any asset and thus did not fall under Section 194I. The CIT(A) held that the assessee was liable to deduct tax under Section 194I and, alternatively, under Section 194J due to the retrospective amendment in the definition of 'royalty'.

Upon appeal, the Tribunal referenced the Bombay High Court's decisions in Income Tax Commissioner, Mumbai City-4 v. Angel Capital & Debit Market Ltd. and CIT-4 v. M/s. The Stock and Bond Trading Company Ltd., which held that VSAT and lease line charges are reimbursements of charges paid by the stock exchange to the Department of Telecommunications and do not involve any element of income. Therefore, no TDS is required on such payments. The Tribunal set aside the CIT(A)'s order and ruled that the assessee was not liable for TDS on lease line charges.

Conclusion:

The Tribunal allowed the appeal of the assessee, ruling that the assessee was not liable for TDS on payments towards internet and communication charges as well as lease line charges. The orders of the CIT(A) treating the assessee as being in default under Sections 201(1) and 201(1A) were set aside.