TDS on Internet Services

   Not liable.

IN THE HIGH COURT OF DELHI

IT Appeal No. 527 of 2007

COMMISSIONER OF INCOME TAX

Vs

ESTEL COMMUNICATIONS (P) LTD

Shri Madan B Lokur & V B Gupta, JJ

Dated : March 7, 2008

Appellant Rep. by : Shri Ms P L Bansal
Respondent Rep. by : Shri R M Mehta

Income Tax - Assessee buys internet bandwidtth from an American company and sells the same to its customers in India - AO treats it as taxable u/s 9(1)(vii) and insists on TDS - Tribunal disagrees - Held, since the payment was made for a simple purchase of internet bandwidtth, no technical services were provided - Revenue's appeal dismissed

JUDGEMENT

The Revenue is aggrieved by the order dt. 8th Sept., 2007, passed by the Tribunal, Delhi Bench 'G', in ITA No. 4560/Del/2003 relevant for the asst. yr. 2001-02.

2. According to the assessee, it is providing internet access of a certain bandwidtth to its subscribers. The main server, on the basis of which the internet services are provided is located in USA. For the services rendered by the assessee to the subscribers in India, it levies a charge and out of this, some amount is paid to the US party, that is, M/s Teleglobe International Corporation (for short Teleglobe').

3. According to the AO. the assessee was liable to deduct tax at source from the payments made to the US party. For arriving at this conclusion, the AO invoked the provisions of s. 9(1)(i) and s. 9(1)(vii) of the IT Act, 1961.

4. Feeling aggrieved by the order passed by the AO, the assessee preferred an appeal which was allowed by the CIT(A). It was held that the assessee was merely providing internet services to its subscribers and, therefore, there was no question of deduction of tax at source in respect of payments made by the assessee to Teleglobe.

5. Against the order passed by the CIT(A), the Revenue preferred an appeal before the Tribunal and we find from a perusal of paragraph 10 thereof that the application of s. 9(1)(i) of the Act was not pressed by the Departmental Representative. The only question that arises, therefore, is about the applicability of the s. 9(1) (vii) of the Act.

6. 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 bandwidtth 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 bandwidtth by the assessee from Teleglobe.

7. Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by Teleglobe to the assessee and, therefore, the provisions of s, 9(1)(vii) of the Act did not apply.

8. We find that the Tribunal has rightly dismissed the appeal after taking into consideration the agreement between the assessee and Teleglobe and the nature of services provided by Teleglobe to the assessee. It was a simple case of payment for the provision of a bandwidtth. No technical services were rendered by Teleglobe to the assessee.

9. On a consideration of the material on record, we find that no substantial question arises in the matter. The appeal is, accordingly dismissed.

Conclusion:

THE Delhi High Court has held that where the assessee used internet bandwidtth of a US company for providing internet access to its Indian subscribers, such transaction cannot be termed as technical services rendered by the US Company, liable to tax in India. The assessee was engaged in the business of providing internet access to its subscribers. The main server, on the basis of which internet services were provided, was in the US. Out of the service charges collected by the assessee from the subscriber, it paid an amount to the US Company. The assessing officer held that the services rendered by the US company were in the nature of technical services as per provisions of section 9(1)(vii) of the Act and therefore, the assessee was liable to deduct TDS on such payment. The High Court observed that there was no privity of contract between the customers and the US company. The assessee was merely paying for an internet bandwidtth to the US firm and then selling it to its customers. Hence, the assessee had only purchased internet bandwidtth. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by the US firm to the assessee. Therefore, it held that the payment was not subject to TDS

And this also

IN THE ITAT MUMBAI BENCH ‘D’

Pacific Internet (India) (P.) Ltd.

v.

Income-tax Officer - TDS, Ward 1(4), Mumbai

R.S. PADVEKAR, JUDICIAL MEMBER

AND REJENDRA SINGH, ACCOUNTANT MEMBER

IT APPEAL NOS. 1607 TO 1609 (MUM.) OF 2006

[ASSESSMENT YEARS 2003-04 TO 2005-06]

DECEMBER 23, 2008

Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fee for professional or technical services - Assessment years 2003-04 to 2005-06 - Assessee-company was engaged in business of providing internet access services to corporate clients and consumers - It availed bandwidtth and network operating infrastructure from VSNL/MTNL and other concerns and made huge payments in lieu of those services - Assessing Officer opined that in respect of said payments assessee should have deducted tax at source - Whether since bandwidtth and network operating facilities availed of by assessee were standard facilities and were not in nature of technical services within meaning of section 194J, read with Explanation 2 to clause (vii) of section 9(1), assessee would not be liable to deduct tax at source under section 194J in respect of payments-in-question - Held, yes

The assessee-company was engaged in the business of providing Internet access services to corporate clients and consumers. It availed bandwidtth and network operating infrastructure from VSNL/MTNL and other concerns and made huge payments in lieu those services. The Assessing Officer was of the opinion that in respect of payments made to MTNL/VSNL for availing of bandwidtth services, the assessee should have deducted tax at source, as is required under section 194J. He, therefore, passed the order, raising the demand against the assessee for its failure to deduct the tax in respect of the payments made to VSNL/MTNL and also levied the interest as per provisions of section 201(1). On appeal, the Commissioner (Appeals) confirmed the said order.

On second appeal:

It was not disputed that the assessee-company was engaged in the business of providing Internet access services to its corporate clients and consumers. 

For providing the sales services, it needed bandwidtth network operating infrastructure. The controversy was whether the services and facilities availed of by the assessee from VSNL/MTNL and other concerns towards bandwidtth and network operating infrastructure could be said to be ‘technical services’ within the meaning of section 194J, read with the Explanation 2 to clause (vii) of section 9(1). [Para 5]

As per provisions of section 194J, (i) there should be payment in the nature of fees; and (ii) said payment should be for availing of 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 the Explanation 2 to clause (vii) of section 9(1). [Para 7]

In the instant case, the assessee had availed of the bandwidtth services and other infrastructure for providing the internet access to its customers. Those were standard facilities availed of by the assessee.

Therefore, it was to be held that the payments made by the assessee-company to VSNL/MTNL and other concerns for availing of the services of the bandwidtth network infrastructure could not be said to be technical services within the meaning of section 194J, read with the Explanation 2 to clause (vii) of section 9(1). Therefore, the appeals filed by the assessee were to be allowed and order passed by the Assessing Officer under section 201(1) and 201(1A) was to be cancelled. [Para 11.1]

CIT v. Estel Communications (P.) Ltd. [2008] 217 CTR (Delhi) 102 (para 11.1) followed.

Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) (para 3.2), CIT v. Estel Communications (P.) Ltd. [2008] 217 CTR (Delhi) 102 (para 4), Wipro Ltd. v. ITO [2003] 86 ITD 407 (Bang.) (para 4) and HFCL Infotel Ltd. v. ITO [2006] 99 TTJ (Chd.) 440 (para 4).

DEAR ISHAD,

NORMALLY PAYMENT FOR INTERNET SERVICES IS NOT COME WITHIN THE TDS PERVIEW. HOWEVER, IF THERE IS SPECIFIC CONTRACT BETWEEN COMPANY AND SCHOOL TO PROVIDE THE INTERNET SERVICE, IT WILL COME UNDER WORKS CONTRACT AND PAYER WOULD THEN  LIABLE TO DEDUCT THE TDS AS PER THE PROVISIONS OF SEC 194C.

REGARDS,

MANOJ

Dear Aditya, Thanks for reply and quoting valuable cases. But in both the cases there was a dispute on payment made against purchase of infrastructure by service provider. But in my case service provider has bought infrastructure from VSNL/MTNL and providing net services to end users. What provisions of TDS should be applicable on payment made by end users to service providers. Do you think payment made for buying infrastructure and payment made by end users to service provider are same in nature?

Dear Manoj, Thanks for reply and giving your valuable time. There are lot of examples in which TDS are applicable on net services. Here question is which section of TDS will be applicable. By doing contract or agreement does not attract provisions of section 194C.

This can be applied then which has been applied in all cases above.

When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisti­cated technical equipment in the exchange to ensure connectivity to its subscriber does not on that score make it provision of a technical service to the subscriber. The subscriber is not con­cerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes so, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile tele­phone is also applicable to fixed telephone service. Neither service can be regarded as ‘technical service’ for the purpose of section 194J of the Act - Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 (Mad.).