2018 (2) TMI 1461 - HC - Income Tax

Addition u/s 40(a)(i) - TDS liability - bandwidth allocation by overseas service provider - fee for technical services - whether the charges paid by the assessee to the MCI WorldCom Asia P. Limited (a non-resident overseas Singapore based entity) ought to have been subjected to tax deduction? - income by way of amounts paid to the overseas entities or non-residents - Held that - In the present case the relevant provisions of the master service agreement have been extracted by the CIT(A). The relevant conditions state that service would mean the specific telecommunication service rendered by WorldCom outside India to the customer and as identified in the relevant Service Order The agreement also places certain restrictions upon the re-sale of the services to the third parties which are provided by the MCI Worldcom Asia P. Limited. If these contractual conditions are taken into account, it is quite apparent that the nature of services in issue is not merely internal bandwidth connectivity but whole range of other services. The payments for these services are determined by relevant service orders , which are agreed to and refused from time to time. In the present case, clearly the Revenue did not examine as to whether the services or any of them fulfil the character of fee so as to result in taxability of the payment in India, in terms of Section 9(1)(vii) of the Act. Thus the impugned order cannot be sustained. It is hereby set aside. The matter is remitted to the Assessing Officer, who shall proceed to examine the materials before him and call for additional expert or technical advice, as is necessary, having regard to the declaration of law in the case of Bharti Cellular Ltd. (2008 (10) TMI 321 - DELHI HIGH COURT).

Summary

Issues:
Challenge to tax deduction on charges paid to non-resident overseas entity under Section 40(a)(i) of the Income Tax Act, 1961.

Detailed Analysis:

1. Background and Dispute: The Revenue challenged an ITAT decision regarding tax deduction on charges paid to a non-resident overseas entity under Section 40(a)(i) of the Income Tax Act, 1961. The AO initially held the sum to be taxable, but the CIT(A) disagreed, citing a master service agreement and a previous court decision.

2. AO and CIT(A) Decisions: The AO assessed the sum for deduction without providing reasons, while the CIT(A) found the amount not liable for tax based on the master service agreement and a court decision regarding bandwidth allocation payments.

3. ITAT Decision: The ITAT rejected the Revenue's appeal, referencing the Appellate Commissioner's decision and analyzing a judgment regarding technical services payments. The Revenue argued that the ITAT erred in following the previous court decision without considering the specifics of the master service agreement in question.

4. Supreme Court Ruling: The Supreme Court's ruling in a similar case emphasized the need for a fact-dependent analysis to determine if payments to overseas entities qualify as "fee for technical services" under the Act.

5. Master Service Agreement: The CIT(A) extracted relevant provisions from the master service agreement, indicating that the services provided by the overseas entity were not limited to internal bandwidth connectivity but included a range of services with specific payment terms.

6. Court Decision: The Court found that the Revenue failed to assess whether the services provided qualified as "fee," necessitating a re-examination of the case by the Assessing Officer with possible expert advice, aligning with the principles established in previous judgments.

7. Conclusion: The impugned order was set aside, and the matter was remitted to the Assessing Officer for a detailed examination in light of the legal principles outlined in previous judgments. The appeals were allowed based on these terms.