2016 (6) TMI 42 - AT - Income Tax

Expenses on account of inter-connectivity charges and usage of leased line - whether payment to M/s. Verizon Hong Kong Ltd., a resident of Hong Kong to be classified either as royalty or income attributed to a Permanent Establishment in India? - TDS liability - Held that - DRP has not insisted upon any evidence to support the findings returned by the AO to reach at the conclusion that the assessee was provided with any technical services by the payee rather the assessee has made reimbursement of the amount in question to the group company as leased line inter-connectivity charges. Furthermore, since there was no contract or the agreement between the assessee and M/s. Verizon Hongkong Ltd., a resident of Hongkong, and the leased line interconnectivity charges were reimbursed to Meridian IQ Asia Limited, Hongkong, which was invoiced by M/s. Verizon Hongkong Ltd., the same is not chargeable to tax in India and as such, no tax is required to be deducted at source. Following the order passed by the coordinate Bench of the Tribunal in the judgment cited as Wipro Ltd. (2003 (4) TMI 223 - ITAT BANGALORE-C), we are of the considered view that the services offered and availed by the assessee company cannot be termed as technical services by any stretch of imagination and the amount in question paid by the assessee is not taxable, hence, the assessee has no liability to deduct the tax at source under section 195 of the Act. - Decided in favour of assessee.

Summary

Issues:
1. Whether the expense booked as lease line connectivity charges by the assessee, paid to an overseas entity without deduction of tax at source, should be allowed in full.
2. Whether the amount paid for interconnectivity charges and leased line usage to a Hong Kong resident should be disallowed under Section 40(a)(i) due to non-deduction of TDS.
3. Whether the payment made by the assessee to the overseas entity should be classified as royalty or income attributed to a Permanent Establishment in India.

Analysis:
1. The assessee contested the addition of an expense of INR 9,37,139 due to non-deduction of tax at source on lease line connectivity charges paid to an overseas entity. The Assessing Officer relied on ITAT Chennai's decision and concluded that TDS was required under section 195, section 9(1)(i), section 9(1)(vi), and section 9(1)(vii) of the Income Tax Act. The assessee argued that the expense did not fall under section 195 and cited precedents to support their claim.

2. The dispute arose from the payment of INR 10,22,179 for interconnectivity charges and leased line usage to a Hong Kong resident without TDS deduction. The Assessing Officer disallowed the amount under Section 40(a)(i) based on the ITAT Chennai decision. The DRP upheld this decision. The Tribunal examined the nature of the payment and the applicability of tax deduction under section 195.

3. The key question was whether the payment to the Hong Kong resident constituted royalty or income attributed to a Permanent Establishment in India. The Tribunal analyzed the nature of services provided, the absence of evidence of technical services, and the standard facility usage. Relying on a similar case precedent, the Tribunal concluded that the payment was not taxable, and the assessee had no obligation to deduct tax at source under section 195.

In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing that the payment for services did not qualify as technical services, and hence, no tax deduction at source was required. The decision was based on the lack of evidence supporting the provision of technical services and the standard nature of the facility usage.