2015 (1) TMI 1018 - AT - Income Tax

Non deduction of tax at source on IUC payments made to non resident telecom operators and capacity transfer payments made to Belgacom - according to the assessee the order is barred by limitation because the proceedings u/s 201 of the Act for assessment year 2007-08 were initiated and completed beyond a reasonable period of time - Held that - When we examine the facts then it would reveal that the Assessing Officer had issued first notice on 6th of June 2011. The financial year 2007-08 would end on 31.03.2008. Even if we take the limitation of 4 years then this would go up to 31.03.2012. Assessing Officer had called for details of payments with regard to IUC payments on 15.05.2012 and thereafter issued notices on 10.12.2012. Thus it cannot be said that notice was not issued within a reasonable period. The learned CIT (A) has observed that for scrutinizing the return notice u/s 143(2) was to be issued within six months from the end of financial year in which the return is furnished and for re-opening of an assessment u/s 147; time limit has been provided from 4 to 6 years from the end of the relevant assessment year as provided u/s 149. Thus the action of the Assessing Officer is within a reasonable time. Therefore we do not see any reason to interfere in the findings of the CIT (A) on this issue. - Decided against assessee. Order of the Assessing Officer not held to be bad in law and void ab initio by CIT(A) - Held that - Payments made (IUC and CTA) by the assessee to NTOs and Belgacom falls within the ambit of section 5 (2) of the Income Tax Act. Alternatively he held that these are in the shape of royalties and it can also be construed as payment of fee for technical services. The learned CIT (A) has not decided the issue with regard to the nature of the payment being FTS because in the opinion of the CIT (A) once the payment contained the nature of the royalty payment then there is no need to look into; whether the payments in the shape of FTS is involved in these payments or not. To our mind basically no specific finding is required on this issue at our end because this is an argument which indicates the alternative position of the law on a particular payment made by the assessee to the non resident. We will deal with the arguments of the learned representative while taking the issue; whether these payments can be termed as royalty payments or FTS. At this stage no specific finding is required on this ground of appeal. - Decided against assessee. Payments accrued or arise in India - taxability need to be determined u/s 5(2)(b) OR u/s 9(1) - Held that - The inference drawn by the learned Revenue authorities that income is deemed to be accrued or arisen in India or accrued or arisen or received in India merely on the basis that such payments was made from India is incorrect. However to the extent that if income is deemed to accrue arisen or receive in India u/s 9 is concerned if (subject to our finding on these aspects) then it will become part of total income u/s 5(2). Thus there is no inherent contradiction between both the sections the only thing is that Revenue authorities in the present case have erred in drawing an inference that when payment is made from India it would be construed that income has been received accrued or arisen in India. To this extent we differ with the conclusions drawn by the learned Revenue authorities below but it is an academic issue in the present case because ultimately taxability would be dependent upon our finding given u/s 9(1)(vi) and 9(1)(vii) i.e. whether the payments involve royalty or FTS. Decided partly for statistical purposes. Characterization of IUC payment - whether the IUC payments made by the appellant to the NTOs qualify as royalty as defined in Explanation 2 to section 9(1)(vi) and whether the appellant was under an obligation to deduct tax at source thereon u/s 185 - India-UK DTAA - Held that - Consideration paid by the assessee as IUC charges for alleged inter connect service falls within the ambit of process royalty and element of income was involved. Therefore the assessee was bound to deduct the TDS on such payment. see case of Verizone Singapore Pte Ltd - 2013 (11) TMI 1058 - MADRAS HIGH COURT - Decided against assessee. Liability to deduct tds - Held that - Once it is found that the amount is not exempt under Art. III of the DTAA and there is no specific provision for assessment of such a receipt in DTAA the applications of treaty comes to an end. Thereafter one has to refer to the provisions of the Income-tax Act to assess the receipt.We are of the view that enquiry contemplated u/s.195(1) does not contemplate a wider scope equivalent to the one available in the regular assessment proceedings. In the present case payee has no concern about the withholding of taxes that is the reason they have not opted for applying the DTAA to these payments at the time when payments were made by the assessee. Thus the assessee failed to demonstrate with sufficient material as to how it harboured a belief that taxes are not to be deducted at source while making the payments. In the enquiry thereafter the Assessing Officer has demonstrated with a reasonable degree that payments involved an element of income u/s.9(1)(vi) Explanations (2) (5) and (6). - Decided against assessee. The next contention raised by the assessee is that liability to deduct tax has been put upon it by virtue of retrospective amendment thus it was impossible for the assessee to deduct TDS at the time of payments is not acceptable as observed that by insertion of Explanation (5) and (6) scope of expression Royalty has not been expanded. These Explanations do not create a different charging position upon the consideration paid by an assessee for use or right to use of any process. These are clarificatory in nature. The position to deduct TDS at the time when assessee made the payments was categorical and it was not persuaded to perform which is impossible to perform. - Decided against assessee.

Summary

Issues Involved:
1. Whether the assessee should be treated in default for non-deduction of tax at source on IUC payments made to non-resident telecom operators and capacity transfer payments made to Belgacom.
2. Whether the order passed by the Assessing Officer is barred by limitation.
3. Whether the order of the Assessing Officer is void ab initio due to lack of conclusive findings on the nature and characterization of the payments.
4. Whether the payments accrued or arose in India merely because they were made by an Indian resident.
5. Whether IUC payments qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA.
6. Whether capacity transfer payments made to Belgacom qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA.
7. Whether the IUC and capacity transfer payments can be considered as fees for technical services.

Detailed Analysis:

1. Whether the assessee should be treated in default for non-deduction of tax at source on IUC payments made to non-resident telecom operators and capacity transfer payments made to Belgacom:
The core issue in these appeals is whether the assessee should be treated in default for non-deduction of tax at source on interconnect usage charges (IUC) payments made to non-resident telecom operators (NTOs) and capacity transfer payments made to Belgacom. The Assessing Officer treated the assessee as in default for not deducting tax at source on these payments, considering them taxable as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA. The CIT(A) upheld the taxability of these payments under Section 5(2) and as royalties but did not address whether they constituted fees for technical services.

2. Whether the order passed by the Assessing Officer is barred by limitation:
The assessee contended that the order passed by the Assessing Officer was barred by limitation, relying on the ITAT decision in the case of Raymond Woolen Mills Ltd. The CIT(A), however, rejected this contention, relying on the decision of the Punjab & Haryana High Court in the case of CIT vs. HMT. The Tribunal upheld the CIT(A)'s findings, noting that the Assessing Officer issued the first notice within a reasonable period, and the action was within a reasonable time.

3. Whether the order of the Assessing Officer is void ab initio due to lack of conclusive findings on the nature and characterization of the payments:
The assessee argued that the order of the Assessing Officer was void ab initio due to the lack of conclusive findings on the nature and characterization of the payments. The Tribunal noted that the Assessing Officer examined the issue under multiple heads, including royalty and fees for technical services, and found that no specific finding was required at this stage. Therefore, this ground of appeal was rejected.

4. Whether the payments accrued or arose in India merely because they were made by an Indian resident:
The Tribunal examined Section 5(2) and Section 9 of the Income Tax Act to determine whether the payments accrued or arose in India. The CIT(A) held that there was no conflict between Sections 5(2) and 9, and the Assessing Officer was correct in articulating that where income is actually received or accrues in India, resort to deeming provisions is not warranted. However, the Tribunal found that the Revenue authorities erred in construing that income accrued or arose in India merely because the payments were made from India. The situs of the source of income was outside India, and the connectivity services were provided and utilized outside India. Therefore, this ground of appeal was partly allowed for statistical purposes.

5. Whether IUC payments qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA:
The Tribunal examined whether IUC payments qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA. The Assessing Officer and CIT(A) concluded that IUC payments involved the use or right to use a process, making them taxable as royalties. The Tribunal upheld this finding, noting that the payments were for the use of or right to use a process, as defined in Explanation 6 to Section 9(1)(vi), which includes transmission by satellite, cable, optic fiber, or similar technology. Therefore, the assessee was bound to deduct tax at source on these payments.

6. Whether capacity transfer payments made to Belgacom qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA:
The Tribunal also examined whether capacity transfer payments made to Belgacom qualify as royalty under Section 9(1)(vi) of the Income Tax Act and the DTAA. The Assessing Officer and CIT(A) concluded that these payments involved the use or right to use a process, making them taxable as royalties. The Tribunal upheld this finding, noting that the payments were for the use of or right to use a process, as defined in Explanation 6 to Section 9(1)(vi). Therefore, the assessee was bound to deduct tax at source on these payments.

7. Whether the IUC and capacity transfer payments can be considered as fees for technical services:
The Assessing Officer examined whether the IUC and capacity transfer payments could be considered as fees for technical services, noting that human intervention was involved in the process. However, the CIT(A) did not adjudicate this issue. The Tribunal remitted this issue to the CIT(A) for fresh adjudication, as the benefit of the CIT(A)'s opinion was not available on record.

Conclusion:
The Tribunal partly allowed the appeals by the assessee and allowed the appeals by the Revenue for statistical purposes, except for ITA No.734/Bang/2013, which was dismissed. The Tribunal upheld the findings of the Assessing Officer and CIT(A) that the IUC and capacity transfer payments were taxable as royalties under Section 9(1)(vi) of the Income Tax Act and the DTAA, and the assessee was bound to deduct tax at source on these payments. The issue of whether these payments constituted fees for technical services was remitted to the CIT(A) for fresh adjudication.