NATURE OF PAYMENT FOR AVAILING BANDWIDTH NETWORK AND OPERATING INFRASTRUCTURE

ITAT, MUMBAI BENCH ‘D’, MUMBAI
Pacific Internet (India) Pvt. Ltd.
v.
ITO
ITA Nos. 1607 to 1609/Mum/06
December 23, 2008


RELEVANT EXTRACTS:
The term technical service has come for the consideration before the Hon’ble Delhi High Court in the case of Estel Communications Pvt. Ltd. (supra). In the said case, the assessee was providing internet bandwidth for providing access to its subscribers. The main server, based on which the internet services were provided were located in USA. In that case, the Assessing Officer was of the opinion that the assessee should have deducted the tax at source as the payment was made for availing the technical services. Negativing the contention of the department, the Hon’ble High Court has held as under:

“In so far as this is concerned, the Tribunal considered the agreement that had been entered into by the assessee with Teleglobe and came to the conclusion that there was no privity of contract between the customers of the assessee and Teleglobe. IN fact, the assessee was merely paying for an internet bandwidth to Teleglobe and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by Teleglobe to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from Teleglobe.

In the case of Wipro Ltd (supra), the issue was in respect of delay in deducting the tax at source of payment made to foreign companies as required u/s 195 of the Act. In the said case also the assessee had availed the services of foreign companies like AT&T, Worldcom, British Telecom, Singtel etc. for downlink to transmit the data to its foreign customers located outside India by availing the technical services by those foreign companies. Most of the services were provided through customer based circuits (CBC) for transmitting the software data. Though the CBC is one service, it is commercially divided into two portions, India portion and International portion. The services with regard to India portion are provided by VSNL and STPI. In the said case, VSNL has standard infrastructure to handle the transmission through satellite as well as the fiber cables. At the end of India portion, a transmission of data is taken over by international service (ISB) and then it was down linked to the assessee's customers located outside India and the entire transmission process was done through satellite by locating the transponder space.

The issue before the Tribunal was whether the payment made to foreign companies are covered within the scope of section 9(1) of clause (vii) of the Act. It was held that the amount paid by the assessee in the said case cannot be considered as fee for technical services within the meaning of clause (vii) of Sec 9 (1) the Act.

Identical view has been taken by the Chandigarh Bench of the Tribunal in the case of HFCL Infotel Ltd (supra). We will refer here the observations of the Hon'ble Madras High Court in the case of Skycell communication Ltd (supra);

“The use of the internet and the worldwide web is increasing by leaps and bounds, and there are hundreds of thousands, if not millions of subscribers to that facility. The internet is very much a product of technology and without the sophisticated equipment installed by the internet service providers and the use of the telephone fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing of technical services from the provider of the internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider.
At the time the Income Tax Act was enacted in the year 1961, as also at the time when Explanation 2 to section 9(1) (vii) was introduced by the Finance (No.2) Act, with effect from April 1, 1977, the product of technology had not been in such wide use as they are today. Any construction of the provisions of the Act must be in the background of the realities of day-to-day life in which the products of technology play an important role in making life smoother and more convenient. Section 194J, as also Explanation 2 in section 9(l)(vii) of the Act were not intended to cover the charges paid by the average householder or consumer for utilising the products of modern technology, such as, use of the telephone fixed or mobile, the cable TV the internet, the automobile, the railway, the aeroplane, consumption of electrical energy, etc. Such facilities which when used by individuals are not capable of being regarded as technical service cannot become so when used by firms and companies. The facility remains the same whoever the subscriber maybe ~ individual, firm or company.

“The Technical service" referred in section 9(l)(vii) contemplates rendering of a 'service' to the payer of the fee. Mere collection of a fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been reached for technical services."

In this case, the assessee has availed the bandwidth services and other infrastructure for providing the internet access to its customers. These arc standard facilities availed by the assessee. Moreover, in our opinion the assessee's case is covered by the decision of the Hon’ ble Delhi High Court in the case of Estel Communications (P) Ltd. We, therefore, hold that the payment made by the assessee company to VSNL, MTNL and other concerns for availing the services of the bandwidth network infrastructure cannot be said to be technical services within the meaning of sec. 194J Act read with Explanation 2 to clause (vii) of sec 9(1) of the Act. We, therefore, allow the appeals filed by the assessee and cancel the order passed by the A.O. u/s 201(1) and201(lA)of the Act.