Services provided without human intervention cannot be treated as technical service

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: ‘C’ NEW DELHI

BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER

AND

SMT. DIVA SINGH, JUDICIAL MEMBER

I.T.A .Nos.-3966 & 3967/Del/2011

(ASSESSMENT YEARs-2004-05 & 2005-06)

ACIT,

Circle-49(1),

New Delhi.

(APPELLANT)

Vs

Hughes Software Systems Ltd.,

 (Now known as Aricent Technologies

 (Holdings) Ltd.), 5, Jain Mandir Marg,

New Delhi-01.

PAN-AAACH0152P

 (RESPONDENT)

Appellant by: Sh. Rajendra Jha, Sr. DR

Respondent by: Sh. Ajay Vohra, Adv &

Sh. Upvan Gupta, CA

ORDER

PER DIVA SINGH, JM

These are two appeals filed by the revenue against the order dated 14.06.2011 of CIT (A)-XXX, New Delhi pertaining to 2004-05 & 2005-06 assessment years. Both these appeal are being decided by a common order for the sake of convenience.

In ITA No-3966/Del/2011, the grounds raised by revenue are read as under:-

“1. In deleting the demand raised on account of considering the performance incentive as part of salary for the purpose of computation of exemption u/s 10(13A) of the I.T.Act, 1961 in respect of HRA paid to the employees.

2. In deleting the demand raised u/s 201(1)/201(1A) of the I.T.Act, on account of considering the link charges as technical services u/s 194J of the I.T.Act.

The appellant craves leave to add, alter or amend any of the grounds of appeal at the time of hearing.”

2. The relevant facts of case are that the assessee company formerly known as Hughes Software Systems Ltd at the assessment stage and at the time of filing of the appeal before the assessee and by the department, the name of M/s Aricent Technologies {Holding} Ltd., (Erstwhile Hughes Software Systems Ltd.), 5, Jain Mandir Marg (Annexe), Connaught Place, New Delhi.

3. The assessee as per material available on record, was engaged in the business of software development of products and providing software services in India and overseas. The assessee was subjected to a survey u/s 133A at the office premises on 16.11.2004 in order to verify whether the assessee had deducted and deposited TDS in government account or not. The assessee in the present proceedings was treated as “assessee in default” u/s 201(1) of the Income Tax Act vide order dated 31.03.2009 of ACIT, Circle-50(1), New Delhi in response of:-

(i) Non-deduction of tax source u/s 192 of the Act in respect of non-inclusion of performance incentive for the purposes of calculating exemption u/s 10(13A) of the Act; and (ii) Non deduction of TDS u/s 194J from the payment made for the use of telecommunication services i.e telephone charges, link charges and band width charges as “fee for technical services” u/s 9(1)(vii) of the Act.

4. As a result thereof, the AO raised a demand for both the financial year 2003- 04 & 2004-05 as under:-

“The total default for both the financial years i.e F.Y. 2003-04 and 2004-05 as discussed are as under :-

5. In appeal before the First Appellate Authority, the CIT(A) allowed the appeal of the assessee by deleting the demand raised u/s 201(1) vide para 3.5 holding as under qua the computation of HRA :-

“3.5. I have considered the submissions of the Ld. AR and also the finding in the assessment order. It is clear from the reading of section 10(13A) of the Act read with rule 2A of the Rules and also the definition of the term “salary” as provided in clause (h) of ruled 2 of Fourth Schedule that for computing exemption of house rent allowance, only basic salary and the dearness allowance, if any, to be taken into account and other allowances and perquisites are to be excluded. The decision of the Kernataka High Court in the case of CIT vs. B. Ghoshal : 125 ITR 744 also supports the contention of the appellant that bonus would not constitute part of salary as defined in rule 2(h) of the Fourth Schedule for computing exemption for house rent allowance in terms of rule 2A of the Income-tax Rules. Having regard to the aforesaid legal position, the contention of the appellant in this regard is accepted and the tax and penalty levied under sections 201(1) and 201(1A) of the Act on this account is directed to be deleted.”

5.1. In regard to the issue pertaining to the link charges, relief was granted vide para 4.8, 4.9 & 4.10 holding as under :-

“4.8. I have considered the submissions made by the appellant and also perused the order passed by the assessing Officer under section 201(1) & 201(1A). The Supreme Court recently in the case of CIT vs Bharti Cellular Ltd. 330 ITR 239 held that “fees for technical services” shall have the same meaning as contained in Explanation2 to clause (vii) of section 9(1) of the Act. Right from 1979, various judgements of the High Courts and Tribunals have taken the view that the words“technical services” have got to be read in the narrower sense by applying the rule of Nosciture a sociis, particularly, because the words “technical services” in section 9(1)(vii) read with Explanation 2 comes in between the words “managerial and consultancy services”. The Supreme court in that case further observed that, to decide the matter, it needs to be examined, whether at any stage, inter alia, any human intervention is involved. The Supreme Court accordingly directed the assessing officer to examine by a technical expert from the side of the department to determine whether the impugned telecom services involved any human intervention.

4.9. In the case of the appellant, payment, in question, are purely for obtaining telecom connectivity which are provided by the telecom service provider through equipment without any human interface or intervention and consequently, the payment cannot be characterized as “fee for technical services” as per the law laid down by the Supreme Court in the case of CIT vs. Bharti Cellular Ltd. (supra). Reliance is also placed on the recent decision of Delhi High Court in the case of Asia Satellite tele-communication Co. Ltd. Vs. DIT (ITA No.-131 of

2003 with 134 of 2003), wherein in identical circumstances, payment for availing satellite connectivity was merely to give access to the broadband available with the transponder to the customer and was held to be not in the nature of royalty.

{The Hon’ble Mumbai bench the Tribunal in the case of DCIT v/s Angel Broking Ltd. 134TTJ681, too held payment made for VSAT, and land line charges etc was nominal fee paid for use of facilities provided by the stock exchange, and cannot be said to in the nature of fees for any technical services.}

4.10. In view of the aforesaid, it is held that the appellant cannot be held to be in default for not deduction of tax at source from payment of tele-communication charges in terms of section 194J of the Act. This ground of appeal is accordingly decided in aforesaid terms. The appellant company uses modern technology to transmit its data to consumers in India and abroad, like telephone and internet connection.

Hence section 194 J is not applicable here for payments to service providers. Hence the grounds of appeals of appellant are allowed.”

6. Aggrieved by this, the Revenue is in appeal before the Tribunal. The Ld. Sr. DR inviting attention to the order u/s 201(1) and 201(1A) of the Act referred to page 4 of the same so as to contend that there has been a short deduction of TDS by the employer in calculation of the HRA exemptions u/s 10(13A) of the Act. As such it was contended that the impugned order deserves to be reversed.

6.1. In regard to the next issue pertaining to the link charges, telephone charges, internet charges etc., attention was invited to page 10 of the order of ACIT, wherein it has been held that band width charges are nothing but charges paid for providing space for transmission of data and would to some extent partake the nature of technical service by the person who sells the bandwidth broadband services. Accordingly, the facility provided by MTNL and other companies for telecommunication etc. accomplished through providing Routes switches dependent agreements would include an agreement of technical services in it. Accordingly the facility provided for inter-connection, port access comes under the ambit of technical services within the meaning of section 194J of the Income Tax Act as technical services. Accordingly, the amount paid for telephone expenses link and telephone expenses BPO link for the FYs 2003-04 & 2004-05, it has been held comes in the ambit of technical services u/s 194J of Act on which on account of the default of non-deduction of tax u/s 201 & 201(A) was calculated.

7. Ld. AR, on the other hand, inviting attention to section 192(1) of the Income Tax Act contended that the duty cast upon the employer in regard to deduction at source at the time of payment of salary is to be worked out on the amount payable at the average rate of income tax computed on the basis of rate applicable of the said year on the “estimated income of the assessee under this head”. For ready reference, we reproduce the relevant portion of the section :-

“Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income tax computed on the basis of the [rates in force] for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.”

8. Specific attention was invited to the wording as appearing in the section in order to canvass that the law mandates that the estimate has to be an honest estimate and also has to be a bona fide estimate and as such the issue in regard thereto is legally settled in favour of the assessee. Inviting attention to page 3 of the order of the ACIT, it was urged that before the said authority that the assessee makes payments of fixed remuneration to the employees under several components namely basic salary, house rent allowance etc. and the payment of performance incentive is made at the discretion of the management and on their approval and cannot be demanded by the employee as a matter of right. It was submitted that it was pointed

out that the performance incentive is subject to the achievement of fixed percentage and becomes part of salary only at that stage. Accordingly in the facts of the present case, the estimate made by the employer, it was urged is a bona fide estimate and has been honestly estimated. Reliance was placed upon the judgement of the Madhya Pradesh High Court in the case of Gwalior Rayon Silk Co. Limited. vs. CIT, 140 ITR 832 M. P. High Court and the judgement of the jurisdictional High Court in the case of CIT vs. Nestle India Ltd. 243 ITR 435 (Delhi) which have been followed by the Jurisdictional High Court in the case of CIT vs Maruti Udyog Ltd. 350 ITR 81 (Del.) (2013) in which their lordship in para 4.4 & 4.5 at page 91 have taken cognizance of the order of the Tribunal in the case of Nestle India Ltd. The said judgement, it was submitted was in the context of section 10(10C) wherein the view in the case of Nestle India was followed which had held that deduction at source by an employer is always a tentative deduction of income-tax subject to regular assessment in the hands of payee. In the facts of that case their Lordships following the judgement in the case of Nestle India Ltd held that the assessee had acted in a bona-fide manner and, therefore cannot be treated as an assessee in default. Inviting attention to the paper book containing the case laws, specific attention was invited to the paper book page 3-9 and again page 10 so as to contend that the SLP file by the department against the judgement of the Hon’ble Delhi High Court in Maruti Udyog Ltd. was dismissed.

9. Inviting attention to another judgement of the Jurisdictional High Court in the case of CIT vs Delhi Public School 203 Taxman 81 (Del.) placed at page 11-14 of the paper book. It was further submitted that their Lordships have held that where the employer had deducted TDS on estimated income of the employee and such an estimate is found to be not incorrect then this fact alone cannot make an employer an assessee in default u/s 201(1) unless it can be reasonably inferred that the employer has not acted honestly and fairly while deducting TDS from the employee’s income.

10. We have heard the rival submissions and perused the material available on record. On a careful consideration of the same, we are of the view that in the facts and circumstances of the present case, the action of the CIT(A) cannot be faulted with the same is well supported by the legal position as considered by the judgements of the Jurisdictional High Court. Although, the Ld. AR has relied on the merits of the case also and the impugned order proceeds with a finding on merit.However, taking into consideration, the principle laid down consistently by the Jurisdictional High Court as considered in the case of Nestle India Ltd (cited supra), Delhi Public School (cited supra) and Maruti Udyog Ltd.(cited supra), we are of the view that in the facts of the case before us where no case has been made out by the Revenue to show that the assessee has acted dishonestly and/or in a mala fide manner. The impugned order deserves to be upheld. The fact that there is a short deduction of tax in the present case where it was linked with the performance incentive paid to the employee on the basis of achievement of fixed percentage, the estimated TDS deducted in a bona fide manner as per the settled legal position cannot be faulted with. There being no allegation of even an iota of mala fide on the part of the assessee, the relief granted by the CIT(A) though on different reasoning is sustained.

11. Qua to next issue agitated by the Revenue, the Sr. DR relying on the order of the ACIT invites specific attention to page 10 & 11 of the said order.

12. The Ld. AR on the other hand relying upon the various judgements referred to in the impugned order contends that the issue is settled in favour of the assessee. Specific attention was invited to the judgement of the Delhi High Court in the case of Asia Satellite Telecommunication Co. Ltd. 332 ITR 340 (Del.), copy of which placed at page 91-118 of the original paper book filed. Reliance was also placed on the judgement of the Hon’ble Madras High Court in the case of Skycell Communication Ltd. Vs DCIT 251 ITR 53 (Madras), copy of which is placed at page 119-122. Inviting attention to the judgement of the Apex Court in the case of CIT vs Bharti Cellular Ltd. 193 Taxman 97 (SC), it was submitted that the Hon’ble Supreme Court had directed the AO to examine a technical expert from the side of the department to determine whether the impugned telecom services involved any human interaction and in the facts of the assessee’s case, it was submitted that the issue in question is that for operating tele-connectivity which has been provided by telecom service providers is dependent on the equipment without any human intervention. Accordingly, it was contended that it cannot be categorized as fee for technical services in line with the judgement of the Hon’ble Delhi High Court and the Hon’ble Madras High Court as well as the Hon’ble Apex Court. Reliance was also placed on the judgement in the case of CIT vs Estel Communication Pvt. Ltd. 318 ITR 185 and order of the Mumbai Bench of Tribunal in the case of DCIT vs Angel Broking Ltd. 134 TTJ 681. In the circumstances, it was contended that there

13. We have heard the rival submissions and perused material available on record. On a careful consideration of the same in the facts which have been discussed at length in the earlier part of this order, we are of the view that the impugned order in the facts as they stand deserves to be upheld. Admittedly the payments are made to MTNL & BSNL etc. for providing space for transmission of date for carriage of voice and for availing the service of inter-communication, port access for which as per the settled uncontested legal position is that no human intervention is necessary. Nothing has been placed before us on behalf of the department to show that the facts have not been correctly appreciated in the case of the assessee. Accordingly, in the facts as they stand the view taken is in alignment with the judgement of the Hon’ble Delhi High Court in the case of Bharti Cellular which had followed the reasoning of the Hon’ble Madras High Court in the case of Skycell Communication Ltd. The fact that the Hon’ble Apex Court in the case of Bharti Cellular has remanded the issue back does not detract from the position as considered by the Hon’ble High Court.

The lack of human intervention in making use of the service provided by BSNL and MTNL etc domains and in the fact as they stated the finding cannot be faulted with. Accordingly, being satisfied by the reasoning and finding arrived in the impugned order, ground no-2 of the department is also dismissed.

14. In the result, the appeal of the department is dismissed.

15. In ITA No-3967/Del/2011, the sole issue agitated is addressed by the second ground in ITA No-3966/Del/2011. The facts & circumstances, position of law and the arguments on behalf of the parties before the Bench remained the same. Following the reasoning while considering Ground No-1 in ITA No-3966, the appeal is dismissed.

14. In the result, the appeals of the departments are dismissed.

The order is pronounced in the open court on 22nd of March 2013.

Sd/- Sd/-

(S.V.MEHROTRA) (DIVA SINGH)

ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 22/03/2013

* Amit Kumar*

Copy forwarded to:

1. Appellant

2. Respondent

3. CIT

4. CIT (Appeals)

5. DR: ITAT

ASSISTANT REGISTRAR

ITAT NEW DELHI