No tax withholding on payments made to MTNL/BSNL for providing internet facility.

PACIFIC INTERNET (INDIA) PVT LTD

Vs

INCOME TAX OFFICER
TDS, Ward 1(4), Mumbai


No tax withholding on payments made to MTNL/BSNL for providing internet facility.

CASE LAW:

1.These appeals filed by the assessee are directed against the order of the ld. CIT(A), Mumbai dated 14-12-2005 for the assessment years 2003-04 to 2005-06.

2. These appeals are arising out of the order passed by the Assessing Officer under section 201(1) and 201(1A) of the Income-tax Act.

3. The assessee has taken the following effective grounds which are common in all the appeals;

“1. The ld. CIT(A)XXX, Mumbai erred in holding that the payments made by the appellant for Bandwidth & Network Cost are fees for professional or technical services within the meaning of section 194J of Income-tax Act, 1961.

2. The ld. CIT(A)XXX, Mumbai erred in confirming the action of the Assessing Officer treating as the assessee in default and in levying interest under section 201(1A) of Income-tax Act, 1961.”

3.1 Briefly stated facts are as under: The assessee-company is engaged in the business of providing internet access services to corporate clients and consumers. There was survey action under section 133A of the Act against the assessee-company on 29-10-2004 and it was found that the assessee had made huge payments for availing services of MTNL and VSNL for using bandwidth and network operating. The Assessing Officer was of the opinion that in respect of the payments made to MTNL/VSNL for availing bandwidth services and port charges, the assessee should have deducted tax at source (TDS) as required under section 194J of the Income-tax Act. The Assessing Officer, therefore, treated the assessee as in default within the meaning of section 201(1) and passed the order, raising the demand against the assessee for failure to deduct the tax in respect of the payments made to VSNL/MTNL and also levied the interest as per the provisions of section 201(1A) of the Income-tax Act.

3.2 The assessee challenged the order passed by the Assessing Officer treating the assessee in default within the meaning of sub-section (1) of section 201 before the CIT(A), but did not find favour. In the opinion of the ld. CIT(A) for providing internet access services to its clients, the assessee-company has to obtain bandwidth and network operating facility from VSNL/MTNL and availing the said facilities amounts to technical services within the meaning of section 194J read with Explanation 2 to clause (vii) of section 9(1) of the Act. The ld. CIT(A) observed that the facility of bandwidth and net workgiven to the appellant is very much a result of applied and industrial science, which is associated with the word ‘technical’. Moreover, bandwidth and network operating facilities are under the command and control of the service providers. The ld. CIT(A) also distinguished the decision of the Hon’ble High Court of Madras in the case of Skycell Communications Ltd. v. CIT [2001] 251 ITR 53 = (2003-TIOL-240-HC-MAD-IT). In his further opinion, the facilities of the bandwidth and network operating facilities cannot to be said to be a standard facility. The operative observations are found in paras 6 and 6.1 of the order of the ld. CIT(A) which are as under :

“6. I have carefully considered the submissions made on behalf of the appellant and gone through the details and documents filed and also perused the order of the Assessing Officer. Admittedly, the appellant is in internet industry, carrying on the activity of internet service provider to corporate clients and consumers. For providing internet access services to its clients, the appellant has to obtain bandwidth and net work operating facility from VSNL, MTNL and other parties for which a payment in lieu of consideration of the services availed by the appellant are made which is termed as bandwidth cost and net work operating cost. The provision of section 194J refers to the payment of (a) fee for professional services or (b) fee for technical services. The services being obtained by the appellant from VSNL, MTNL and other parties, of course, cannot be categorized as ‘professional services’, the services rendered by way of allowing the appellant to have facility through bandwidth and net work operation is certainly a technical service as contemplated in Explanation II to clause (vii) of section 9(1) of the Income-tax Act, 1961. The facility of bandwidth and net work given to the appellant is very much a result of applied and industrial science, which is admitted by the appellant also in its aforesaid submissions, as the popular meaning associated with the word ‘technical’. It is also an admitted fact that for availing the facility through bandwidth and net work operation, payments have been made as consideration to the service providers viz., MTNL, VSNL and other parties. It is also an admitted fact that the appellant has no control of its own, on these facilities. The bandwidth and net work operating facilities are under the command and control of the service providers. By providing facility to the appellant through bandwidth and net work operating terminals of VSNL & MTNL, it has been allowed to operate the internet service providing facility to its clients. Therefore, a provision of section 194J is applicable.

6.1 The contention of the appellant that the payment made for availing facility of bandwidth and net work operation are not technical services as held by the Hon’ble High Court on Madras in Skycell Communications Ltd., is also not found to be having any merit as this decision is not applicable to the facts of the appellant’s case. The Assessing Officer in his report has also differentiated the facts of the case of M/s. Skycell Communications Ltd. to the appellant’s case. The decision in that case was delivered to the petitioners who were engaged in the business of providing cellular mobile facility to subscribers, having been authorized to do so under the licences granted by the Department of Telecommunication, Government of India. The Hon’ble High Court in that context has held that collection of fee for use of ‘standard facility’ provided to all those willing to pay for it does not amount to fee having been received for technical services.

Whereas, in the case of appellant the payment made for availing facility of bandwidth and net work, operating terminal cannot be said to be a standard facility. Moreover, it is also not disputed that on the basis of CBDT’s circular ‘access charges’ ‘port charges’ and interconnectivity charges paid are held to be payments in the nature of fees for technical services within the meaning of section 194J of Income-tax Act, 1961. Admittedly, the appellant through its submissions has further referred to the circular issued by CBEC dated 8-8-2002 which clarifies the definitions of these technical words. In this circular at clause (i) para 1, it clarifies that interconnecting link charges are charges relating to interconnectivity provided between basic/cellular telephone providers and the BSNL/MTNL exchanges. This enables the private basic telephone operators or the mobile service providers to access BSNL telephone lines and vice versa. Further in para 6, interconnectivity linked charges is defined as charges for providing ‘leased circuits’ and with effect from 16-7-2001, this service is stated to have been brought under the coverage of service tax. In clause (iii) of para, ‘port charges’ is defined as something link entry charges for allowing access into the BSNL net work. The facility enjoyed by the appellant by way of bandwidth and net work operation is also similar to the service of interconnectivity or leased circuits or port charges as clarified above. This being held to be covered for service tax, the payments made for availing the service of bandwidth and net work operating are very much in the nature of technical services. When the access charges, port charges and interconnectivity charges as admitted by the appellant itself are covered under section 194J, the bandwidth and net work operating facility is bound to be covered under section 194J.”

The ld. CIT(A) finally approved the view taken by the Assessing Officer, but gave some relief in respect of working of the interest under section 201(1A) of the Act.

4. We have heard the rival submissions of the parties. We have also carefully considered the facts which are available before us. We have also considered the different precedents relieved upon by the ld. counsel of the assessee. The arguments of the ld. counsel of the assessee is that as the assessee is providing internet services to its clients. The assessee needs bandwidth and net work operating infrastructure without which the assessee cannot run its business. At the same time, availing bandwidth and net work operating facilities from MTNL/VSNL etc., cannot be said to be availing technical services as contemplated under section 194J read with Explanation 2 to clause (vii) of section 9(1) of the Act. The ld. counsel of the assessee placed heavy reliance on the following precedents :

(i) CIT v. Estel Communications (P.) Ltd. [2008] 217 CTR (Delhi) 102.

(ii) Wipro Ltd. v. ITO [2003] 86 ITD 407 (Bang.).

(iii) HFCL Infotel Ltd. v. ITO [2006] 99 TTJ (Chd.) 440.

(iv) Skycell Communications Ltd.’s case (supra).

4.1 Per contra, the ld. DR vehemently submitted that the decision of the Hon’ble High Court of Madras in the case of Skycell Communications Ltd. (supra) is not applicable on the facts of the present case. It is argued that availing the bandwidth net work operating facility is nothing but in the name of availing technical services from VSNL/MTNL and other concerns. He, therefore, submitted that in view of the provisions of section 194J, the assessee should have deducted the tax in respect of the payment made to VSNL/MTNL and other extra for availing bandwidth net work operating facility per the statutory provisions. The ld. DR further placed reliance on the orders of the authorities below.

5. As far as the facts are concerned, there is no dispute that the assessee-company is engaged in the business of providing internet access services to its corporate clients and consumers. For providing the sales service, the assessee needs bandwidth net work operating infrastructure. The controversy is whether the services are facilities availed by the assessee from VSNL/MTNL and other concerns towards bandwidth and net work operating infrastructure can be said to be ‘technical services’ within the meaning of section 194J read with Explanation 2 to clause (vii) of section 9(1). Section 194J prior to amendment by the Finance Act, 2006 reads as under :

“194J. Fees for professional or technical services.—(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

(A) from any sums as aforesaid credited or paid before the 1st day of July, 1995; or

(B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—

(i) twenty thousand rupees, in the case of fees for professional services referred to in clause (a), or

(ii) twenty thousand rupees, in the case of fees for technical services referred to in clause (b).

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(2) Where the Assessing Officer is satisfied that the total income of any person in receipt of the sum referred to in sub-section (1) justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by that person in this behalf, give to him such certificate as may be appropriate.

(3) Where any such certificate is given, the person responsible for paying the sum referred to in sub-section (1) shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.”

6. The meaning to term ‘technical services’ has been adopted in section 194J as defined in Explanation 2 to clause (vii) of section 9(1) which reads as under :

“Explanation.—For the purposes of this section,—

(a) ‘professional services’ means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section;

(b) ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(c) where any sum referred to in sub-section (1) is credited to any account, whether called ‘Suspense account’ or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.”

7. As per provisions of section 194J of the Act (i) there should be payment in the nature of fees and (ii) said should be for availing the technical services. Again expression ‘technical service’ has not been defined in section 194J but meaning given to the said expression has been adopted from Explanation 2 to clause (vii) of section 9(1).

8. The term ‘technical service’ has come for the consideration before the Hon’ble Delhi High Court in the case of Estel Communications (P.) 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 :

“Insofar 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.”

9. 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 under section 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 fibre 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.

10. 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 section 9(1) of the Act.

11. 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 1-4-1977, 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(1)(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(1)(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.”

11.1 In this case, the assessee has availed the bandwidth services and other infrastructure for providing the internet access to its customers. These are 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. (supra). We, therefore, hold that the payment made by the assessee-company to VSNL, MTNL and other concerns for availing the services of the bandwidth net work infrastructure cannot be said to be technical services within the meaning of section 194J of the Act read with Explanation 2 to clause (vii) of section 9(1) of the Act. We, therefore, allow the appeals filed by the assessee and cancel the order passed by the Assessing Officer under section 201(1) and 201(1A) of the Act.

12. In the result, the appeals filed by the assessee are allowed.