2008 (10) TMI 321 - HC - Income Tax

TDS - Payment of interconnection charges for interconnection provided through port - fee for use of a standard facility - Expression fees for technical services - business of providing cellular telephone facilities to their subscribers - interconnection between the two networks is provided by MTNL/BSNL at interconnection points known as ports - Words managerial and consultancy - doctrine of noscitur a sociis. HELD THAT - It is apparent from the record that both the words managerial and consultancy involve a human element. And both managerial service and consultancy service are provided by humans. Consequently applying the rule of noscitur a sociis the word technical as appearing in Explanation 2 to section 9(1) (vii) would also have to be construed as involving a human element. But the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too sophisticated technology but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1) (vii) of the said Act. This is so because the expression technical services takes colour from the expressions managerial services and consultancy services which necessarily involve a human element or what is now a days fashionably called human interface. In the facts of the present appeals the services rendered qua interconnection/port access do not involve any human interface and therefore the same cannot be regarded as technical services as contemplated under section 194J of the said Act. The word technical is preceded by the word .managerial. and succeeded by the word consultancy . Therefore the word technical has to take colour from the word managerial and consultancy and the three words taken together are intended to apply to those services which involve a human element. This concludes our discussion on the applicability of the principle of noscitur a sociis. The interconnect/port access facility is only a facility to use the gateway and the network of MTNL/other companies. MTNL or other companies do not provide any assistance or aid or help to the respondents/assessees in managing operating setting up their infrastructure and networks. No doubt the facility of interconnection and port access provided by MTNL/other companies is technical in the sense that it involves sophisticated technology. The facility may even be construed as a service in the broader sense such as a communication service . But when we are required to interpret the expression technical service the individual meaning of the words technical and service have to be shed. And only the meaning of the whole expression technical services has to be seen. Moreover the expression technical service is not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions managerial service and consultancy service as appearing in Explanation 2 to section 9(1)(vii) of the said Act. Thus the expression technical service would have reference to only technical service rendered by a human. It would not include any service provided by machines or robots. Hence the interconnect charges/port access charges cannot be regarded as fees for technical services . Consequently both the questions are answered against the Revenue and in favour of the assessees. The appeals are dismissed. The parties are left to bear their own costs.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment were:

(a) Whether payments made by the assessees to MTNL/other companies for services provided through interconnect/port/access/toll were liable for tax deduction at source under section 194J of the Income-tax Act, 1961.

(b) Whether the Income-tax Appellate Tribunal erred in holding that such payments would not fall within the purview of section 194J as fees for technical services, thus not requiring tax deduction at source.

ISSUE-WISE DETAILED ANALYSIS

Issue (a): Liability for Tax Deduction at Source under Section 194J

Relevant legal framework and precedents: Section 194J of the Income-tax Act mandates tax deduction at source for payments made as fees for professional or technical services. The term "fees for technical services" is defined in Explanation 2 to section 9(1)(vii) to mean consideration for rendering managerial, technical, or consultancy services.

Court's interpretation and reasoning: The Court examined whether the interconnect/port access charges paid by the assessees to MTNL/other companies constituted "fees for technical services." The Court applied the rule of noscitur a sociis, which suggests that words in a list should be understood in relation to each other. Thus, "technical services" should be interpreted in the context of "managerial" and "consultancy" services, both of which involve a human element.

Key evidence and findings: The Court considered the nature of the interconnection services, which are provided automatically by machines without human intervention. The services involved sophisticated technology but did not involve human expertise or intervention.

Application of law to facts: The Court determined that since the interconnect/port access services did not involve human intervention, they could not be classified as "technical services" under section 194J. The Court relied on the precedent set by the Madras High Court in Skycell Communications Ltd., which held that mere use of sophisticated equipment does not constitute technical services.

Treatment of competing arguments: The Revenue argued that the payments were for technical services due to the involvement of sophisticated technology. However, the Court rejected this argument, emphasizing the lack of human involvement in the service provision.

Conclusions: The Court concluded that the interconnect/port access charges did not qualify as fees for technical services under section 194J, and therefore, the assessees were not liable to deduct tax at source for these payments.

Issue (b): Tribunal's Decision on Non-Applicability of Section 194J

Relevant legal framework and precedents: The Tribunal had relied on the decision in Skycell Communications Ltd., which distinguished between payments made by subscribers to service providers and payments between service providers.

Court's interpretation and reasoning: The Court found that the Tribunal correctly applied the principles from Skycell Communications Ltd., noting that the nature of the payments in question did not involve human intervention, and thus, did not constitute technical services.

Key evidence and findings: The Court reiterated that the interconnect/port access services were automated and did not involve human expertise, aligning with the Tribunal's findings.

Application of law to facts: The Court agreed with the Tribunal's application of the law, emphasizing that the absence of human involvement in the service provision meant the payments were not for technical services.

Treatment of competing arguments: The Revenue's attempt to distinguish the case from Skycell Communications Ltd. was rejected, as the Court found the underlying principles applicable to the current case.

Conclusions: The Court upheld the Tribunal's decision, confirming that the payments were not subject to tax deduction under section 194J.

SIGNIFICANT HOLDINGS

The Court established the principle that for services to be classified as "technical services" under section 194J, there must be a human element involved. The mere use of sophisticated technology does not suffice.

Preserve verbatim quotes of crucial legal reasoning: "The expression 'technical services' would have to take colour from the expressions 'managerial services' and 'consultancy services' which necessarily involve a human element or, what is now a days fashionably called, human interface."

Core principles established: The Court emphasized the importance of human involvement in determining whether a service is "technical" for the purposes of tax deduction under section 194J.

Final determinations on each issue: Both questions were answered against the Revenue, affirming that the interconnect/port access charges were not subject to tax deduction at source as fees for technical services.