2018 (5) TMI 1150 - AT - Income Tax

TDS u/s 194I or 195 - whether payments pertaining to the first issue of last mile charges are liable for TDS deduction as fee for professional / technical services rather than rent u/s 194I? - Held that - There is no denial of the basic fact that the assessee has made the impugned last mile payment in lieu of availing a standard facility of hiring of one pair of optical dark fibre to provide last mile end connectivity. It uses its own internet bandwidth in this entire exercise of involving only hiring of about optical as dark fibre. The Revenue fails to indicate that the said hiring creates any kind of right being vested in assessee s favour regarding control of the equipment hardware. A coordinate bench in M/s Standard Chartered Bank vs. CIT 2011 (5) TMI 580 - ITAT, Mumbai holds in similar circumstances that a payment made for availing equipment facilities of standard nature without any control on the corresponding hardware does not amount to royalty u/s 9(1)(vi) Explanation-2 clause (iva) of the Act. Revenue seeking to apply the relevant amended provision in Section 9(1)(vi) of the Act inserted by the Finance Act, 2012 with retrospective effect in impugned assessment year 2010-11 - Held that - We find this issue to be no more res integra since hon ble Bombay high in CIT vs. NGC Networks India Pvt. Ltd. 2018 (5) TMI 1148 - BOMBAY HIGH COURT has already concluded the above amendment is not applicable with retrospective effect as per rule of impossible compliance since the liability to deduct TDS cannot be fastened on a deductor assessee after the end of relevant previous year. As asked the Revenue to specifically indicate any material suggesting the assessee to have any control over these three equipments of optical dark fibre, bandwidth for production and interconnective uses charges so as to involve royalty component in the impugned payments. There is no such materials. The CIT(A) s has rightly concluded the assessee s three payments to be in lieu of standard facilities only not to be taken as royalty - Decided against revenue

Summary

Issues Involved:
1. Classification of last mile charges for TDS purposes.
2. Classification of bandwidth protection charges for TDS purposes.
3. Classification of interconnectivity usage charges (IUC) for TDS purposes.
4. Applicability of retrospective amendments to TDS provisions.
5. Validity of consequential penalties under Section 271C of the Income Tax Act.

Detailed Analysis:

1. Classification of Last Mile Charges for TDS Purposes:
The Revenue contended that the last mile charges should be classified as royalty under Section 9(1)(vi) Explanation-2 (iva) of the Income Tax Act, and thus subject to TDS under Section 194J. However, the CIT(A) held that these charges are analogous to rent and should be subject to TDS under Section 194I. The Tribunal agreed with the CIT(A), noting that the payments were for hiring optical dark fiber to provide end connectivity, which does not involve any control over the equipment by the assessee. The Tribunal referenced the case of M/s Standard Chartered Bank vs. CIT, where it was held that payments for standard equipment facilities without control over the hardware do not amount to royalty. Therefore, the Tribunal upheld the CIT(A)’s conclusion that TDS was correctly deducted under Section 194I.

2. Classification of Bandwidth Protection Charges for TDS Purposes:
The Revenue argued that bandwidth protection charges should be subject to TDS under Section 194J as fees for technical services. The CIT(A) found that these charges were for hiring bandwidth capacity from third-party telecom operators, which did not involve any technical services. The Tribunal upheld the CIT(A)’s decision, referencing cases such as Asia Satellite Telecommunications Co. Ltd. v. DIT and Vodafone East Limited vs. ACIT, which held that hiring bandwidth capacity does not constitute technical services. Therefore, the Tribunal concluded that TDS was not applicable under Section 194J for bandwidth protection charges.

3. Classification of Interconnectivity Usage Charges (IUC) for TDS Purposes:
The Revenue claimed that IUC should be classified as royalty and subject to TDS under Section 194J. The CIT(A) held that IUC is a standard facility involving no human intervention and should not be classified as royalty. The Tribunal agreed, referencing the case of Vodafone East Limited vs. ACIT, which held that interconnectivity and network usage charges do not constitute technical services or royalty. Therefore, the Tribunal upheld the CIT(A)’s decision that TDS was not applicable under Section 194J for IUC.

4. Applicability of Retrospective Amendments to TDS Provisions:
The Revenue argued that the amendments to Section 9(1)(vi) by the Finance Act, 2012, which defined certain payments as royalty, should apply retrospectively to the assessment years in question. The CIT(A) held that retrospective amendments cannot impose TDS liability for past payments, referencing various case laws. The Tribunal upheld this view, citing the Bombay High Court judgment in CIT vs. NGC Networks India Pvt. Ltd., which stated that retrospective amendments cannot impose TDS liability due to the "rule of impossible compliance." Therefore, the Tribunal concluded that the retrospective amendments did not apply to the assessment years in question.

5. Validity of Consequential Penalties under Section 271C:
The Revenue sought to revive penalties under Section 271C for failure to deduct TDS. Since the Tribunal upheld the CIT(A)’s decisions on the classification of payments and applicability of TDS, it found no basis for the penalties. Therefore, the Tribunal dismissed the appeals seeking to revive the penalties.

Conclusion:
The Tribunal dismissed all four appeals filed by the Revenue, upholding the CIT(A)’s decisions on the classification of payments for TDS purposes and rejecting the applicability of retrospective amendments to impose TDS liability. Consequently, the penalties under Section 271C were also dismissed. The order was pronounced in the open court on 17/05/2018.