2008 (3) TMI 327 - HC - Income Tax

Deduction of tax at source from payment made to non-resident assessee providing internet access of a certain bandwidth to its subscribers - The main server, on the basis of which the internet services are provided is located in the USA. - According to the Assessing Officer, the assessee was liable to deduct tax at source from the payments made to the US party. - Assessing Officer invoked the provisions of section 9(1) (i) and section 9(1)(vii) - It was a simple case of payment for the provision a bandwidth. - Tribunal rightly came to the conclusion that there were no technical services provided by Teleglobe to the assessee and, therefore, the provisions of section 9(1) (vii) of the Act did not apply. No substantial question arises in the matter

Summary

Issues:
Interpretation of sections 9(1)(i) and 9(1)(vii) of the Income-tax Act, 1961 regarding tax deduction on payments made to a US party for internet services provided to Indian subscribers.

Analysis:

1. The Revenue challenged the order of the Income Tax Appellate Tribunal concerning the assessment year 2001-02, arguing that tax should have been deducted at the source from payments made to a US party for internet services provided to Indian subscribers.

2. The Assessing Officer relied on sections 9(1)(i) and 9(1)(vii) of the Income-tax Act, 1961 to assert the tax liability. However, the Commissioner of Income-tax (Appeals) allowed the assessee's appeal, stating that the assessee was merely providing internet services and not required to deduct tax at source. The Revenue appealed to the Tribunal, focusing on the applicability of section 9(1)(vii) as section 9(1)(i) was not pressed.

3. The Tribunal analyzed the agreement between the assessee and the US party, Teleglobe, and concluded that there was no privity of contract between Teleglobe and the customers of the assessee. It determined that the payments were for internet bandwidth, not technical services, as Teleglobe did not provide such services to the assessee. Therefore, section 9(1)(vii) did not apply.

4. The Tribunal's decision was based on the nature of the agreement and services provided by Teleglobe, emphasizing that no technical services were rendered. The Tribunal dismissed the appeal, affirming that the payments were for the provision of bandwidth, not technical services.

5. The High Court upheld the Tribunal's decision, stating that after reviewing the material on record, no substantial question arose. Consequently, the appeal was dismissed, affirming that the payments made were for internet bandwidth and not subject to tax deduction at source.

This comprehensive analysis highlights the key legal interpretations and conclusions drawn by the Tribunal and the High Court regarding the tax liability on payments made for internet services provided to Indian subscribers.