2021 (10) TMI 1005 - AT - Income Tax

TDS u/s 195 - IT support services - Fee for technical services or not - TDS on Admin and Network Support service charges paid by Hitachi Metglass India Pvt. Ltd. to Metglass INC USA, Hitachi Asia Ltd. Singapore and Hitachi Ltd. Japan - payments made for network and administrative support charges are characterized as FTS under section 9(1)(vii) of the Act and therefore the appellant is liable to deduct tax at source - HELD THAT - We find that the services provided by the non-resident AEs to the Assessee are standard automated services. These services, as specified above, are provided to enable the assessee to send and receive data through the broadband network over the intranet and internet. All companies of the Hitachi group are provided with network services to exchange information through intranet and regulate use of internet through its proxy servers or provide remote access to log on to the company's network. It is a settled law that standard/common services cannot partake the character of FTS under the IT Act. Foreign AE (service provider) has neither employed any technical or skilled person to provide managerial or technical service nor there was direct interaction between the assessee and the foreign AE. Thus, where the entire process resulting in provisioning of service is fully automated process with no human intervention, charges paid for provision of such services cannot be classified as FTS for the purpose of the IT Act. The invoices raised by Hitachi Limited, Japan and Hitachi Asia Limited, Singapore to the Assessee in lieu of the services received by the latter make it clear that services provided by foreign AEs were not technical in nature but were standard intranet, broadband and link services. Payment of network charges does not take the character of FTS due to absence of human intervention Hence, the services received by the assessee can be said to be not in the nature of FTS as defined under Explanation 2 to Section 9(1)(vii) of the IT Act. To treat any consideration as FTS, such consideration must be paid for rendering of managerial, technical or consultancy services. Disallowance of amount includes amounts accrued towards link charges payable to Airtel and BSNL and misc. provision. The revenue failed to consider the fact that the IT support services availed by the Assessee did not involve any human intervention. The Ld. CIT(A) reproduced extracts of the Master Service Agreement between the Assessee and Hitachi Asia Limited, Singapore and observed that human intervention is an integral part of the Master Service Agreement which is completely misconceived. In fact, no reasons were provided by the Ld. CIT(A) as to how human intervention was an integral part of the Master Service Agreement. It is held that the IT support services availed by the Assessee from Hitachi Ltd., Japan, and Hitachi Asia Ltd., Singapore are standard connectivity and networking services cannot be termed as technical services within the meaning of Section 9(1)(vii) of the Act. Hence, we hold that the assessee was not liable to deduct TDS on such expenditures. Accordingly, the disallowance made by the AO and confirmed by the Ld. CIT(A) in the present case is liable to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(i) of the Income Tax Act.
2. Characterization of network and administrative support services as Fee for Technical Services (FTS) under section 9(1)(vii) of the Act.
3. Requirement of human intervention in the services rendered.
4. Obligation to deduct tax at source under section 195 of the Act.
5. Consideration of materials/submissions during assessment/appellate proceedings.
6. Allegation of furnishing inaccurate particulars of income and initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(i) of the Income Tax Act:
The assessee challenged the disallowance of INR 35,60,212 under section 40(a)(i) for non-deduction of TDS on payments made for network and administrative support services. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that these payments were for technical services and thus subject to TDS.

2. Characterization of Network and Administrative Support Services as FTS:
The AO and CIT(A) considered the services rendered by non-resident group companies as technical in nature, falling under the definition of Fee for Technical Services (FTS) as per section 9(1)(vii) of the Act. They presumed an element of managerial, technical, or consultancy services, which was contested by the assessee.

3. Requirement of Human Intervention:
The assessee argued that the services did not involve human intervention, which is a necessary criterion for classifying a service as FTS. The CIT(A) referred to sections of the Master Service Agreement, suggesting human intervention was integral, but the Tribunal found no evidence of such intervention in the actual provision of services.

4. Obligation to Deduct Tax at Source under Section 195:
The AO held that the assessee was liable to deduct TDS on the payments made for network and administrative support services under section 195. The Tribunal, however, concluded that the services were standard automated services without human intervention and thus did not qualify as FTS, eliminating the TDS obligation.

5. Consideration of Materials/Submissions during Assessment/Appellate Proceedings:
The assessee contended that the AO and CIT(A) did not consider all materials and submissions provided during the proceedings. The Tribunal reviewed the relevant sections of the agreement and found that the services were automated and did not involve human intervention, contrary to the CIT(A)'s findings.

6. Allegation of Furnishing Inaccurate Particulars of Income and Initiation of Penalty Proceedings:
The AO proposed to initiate penalty proceedings under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The Tribunal's decision to classify the services as non-technical and automated, thus not subject to TDS, would impact the basis for such penalty proceedings.

Conclusion:
The Tribunal held that the services provided by the non-resident AEs were standard automated services without human intervention and did not qualify as FTS under section 9(1)(vii) of the Act. Consequently, the assessee was not liable to deduct TDS on these payments. The disallowance made by the AO and confirmed by the CIT(A) was deleted, and the appeal of the assessee was allowed.