2023 (2) TMI 161 - AT - Income Tax

TDS u/s 195 - Royalty and FTS payment for non deduction of TDS - disallowance of connectivity charges paid by the assessee to TATA Communications UK Ltd. (TATA UK) and TATA US treating the same as Royalty and FTS for non deduction of TDS and disallowed by invoking section 40(a)(i) - HELD THAT - We noted that the assessee-company is incorporated under the Companies Act and is engaged in the business of running a data and call centre for export of services and domestic BPO. A.O noted that the connectivity charges in relation to TATA Communications (UK) Ltd. and TATA Communications (USA) are in the nature of royalty in term of Explanation 2 to s. 9(1)(vii) - CIT(A) also held, after perusing the agreement between the assessee and TATA Communications, noted that it provides for specialized and customized services to be rendered by the supplier to the customers pertaining to plant maintenance on customers equipment. CIT(A) perused Services Schedule to the said agreement that, if requested by the customer, the supplier may at its option install certain customer specified communication equipment and render miscellaneous services to the customer. According to Ld. counsel, connectivity charges are in the nature of Colocation services provided by the TATA Communications, UK and TATA Communications, USA for the purpose of connecting the assessee with the various customers in UK towards making the voice and data connectivity. As in the case of Verizon Communications Singapore Pte Ltd 2013 (11) TMI 1058 - MADRAS HIGH COURT has clearly held that the use of the process was provided by the assessee whereby through assured bandwidth the customer is guaranteed the transmission of the data and voice. In such circumstances, it is held that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of the royalty as per Clause (iii) of Explanation 2 to s. 9(1)(vii) of the Act. As Hon ble Jurisdictional High Court Supra has clearly held on similar facts as in the present case before us i.e., Co-location services and connectivity services provided for the process of connecting by the assessee with the various customers towards making voice and data connectivity. Hence, respectfully following the decision of Verizon Communications Singapore Pte Ltd. Vs. ITO, supra, we confirm the action of the lower authorities and dismiss this issue of assessee s appeal.

Summary

Issues Involved:
1. Disallowance of connectivity charges paid to TATA Communications UK Ltd. and TATA US treating the same as Royalty and Fees for Technical Services (FTS) for non-deduction of TDS.

Issue-wise Detailed Analysis:

1. Disallowance of Connectivity Charges:
The assessee-company, engaged in the business of Data & Call Centre for Export of services & Domestic BPO, filed its returns for the Assessment Years 2012-13, 2013-14, 2014-15, and 2015-16. The Assessing Officer (A.O) observed that the assessee made payments for connectivity charges to TATA Communications UK Ltd. and TATA US without deducting TDS. The A.O invoked Section 40(a)(i) of the Income Tax Act, 1961, disallowing these payments, treating them as royalty under Explanation 6 to Section 9(1)(vi) of the Act.

2. Assessee's Argument:
The assessee contended that the payments were not subject to TDS as the payees had no business connection or permanent establishment in India. The payments were for regular business charges and not for the right to use any equipment or technical knowledge, thus not falling under the definition of Royalty or FTS.

3. CIT(A)'s Decision:
The CIT(A) upheld the disallowance concerning payments to TATA Communications UK Ltd., stating that the services provided involved the use of equipment and triggered equipment royalty taxation. The CIT(A) relied on the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pvt. Ltd. vs. ITO, which held that IPLC services involve the use of equipment and are subject to royalty taxation.

4. Tribunal's Analysis:
The Tribunal reviewed the facts and the agreement between the assessee and TATA Communications UK Ltd. The agreement included provisions for specialized and customized services, including plant maintenance on the customer's equipment. The Tribunal noted that similar arguments were made in the case of Verizon Communications Singapore Pte Ltd. vs. ITO, where the High Court held that the use of the process provided by the assessee, guaranteeing the transmission of data and voice through assured bandwidth, constituted royalty.

5. Assessee's Reliance on Other Cases:
The assessee relied on the decision of the Mumbai Tribunal in the case of Rackspace, US Inc. Vs. Dy. CIT, which held that cloud hosting services do not constitute royalty as the payer does not have possession or control over the equipment. The assessee also cited the Hon'ble Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited Vs. CIT.

6. Revenue's Argument:
The Revenue argued that the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pte Ltd. vs. ITO was directly applicable. The High Court had held that payments for the use and right to use the process, even when bandwidth is shared, fall under the definition of royalty.

7. Tribunal's Conclusion:
The Tribunal, following the Jurisdictional High Court's decision in the case of Verizon Communications Singapore Pte Ltd. vs. ITO, held that the connectivity charges paid to TATA Communications UK Ltd. constituted royalty. The Tribunal dismissed the assessee's appeals, confirming the disallowance under Section 40(a)(i) of the Act.

Final Judgment:
All four appeals by the assessee were dismissed, and the order pronounced on 11th January 2023 confirmed the disallowance of connectivity charges as royalty for non-deduction of TDS.