Madras High Court Allows Assessee in Tax Appeal on TDS Obligation for IPLC Payments — Payment for International Private Leased Circuits Not Royalty Under Section 9(1)(vi) of Income Tax Act, 1961, and No Tax Deduction at Source Required Under Section 195

Appeal under Section 260A of the Income Tax Act against order of Income Tax Appellate Tribunal confirming revision under Section 263 of assessment for Assessment Year 2002‑03.

The assessee sought to overturn the ITAT's order and obtain a ruling that no TDS under Section 195 was required on payments for IPLC services and that the expenditure should not be disallowed as royalty.

The Assessing Officer disallowed expenditure of Rs.5,42,18,347 paid to Sprint Communications, USA for International Private Leased Circuits (IPLC) services, treating it as royalty and non‑deduction of TDS under Section 195, which was upheld by the Commissioner under Section 263 and subsequently by the ITAT.

The assessment was revised by the Commissioner of Income Tax under Section 263; the assessee's appeal before the CIT (Appeals) and the Income Tax Appellate Tribunal was dismissed.

Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in rejecting the Appellant's contention that the provisions of Section 263 of the Income Tax Act are not applicable to the assessment made under Section 143(3) of the Income Tax Act in respect of Assessment Year 2002-2003? Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in not holding that when the foreign currency expenditure is excluded from the "export turnover" based on the principle of parity, the same should also be excluded from "total turnover" for the purpose of computing exemption/deduction under Section l0A/l0B? Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in making observations on the merits of the issue pertaining to disallowance under Section 40(a)(ia) of the Income Tax Act relying on Case Law that is distinguishable on facts and in law, particularly since the issue has only been remitted to the file of the Assessing Authority for consideration by the Commissioner of Income Tax? Whether on the facts and in the circumstances of the case the Income Tax appellate Tribunal is right in law in holding that tax has to be deducted under Section 195 in respect of payments made to entitles having business/Permanent establishment outside India irrespective of the fact whether such recipient is subject to tax in India or not?

The appellant contended that the payment for IPLC services is a revenue expenditure and not royalty, and since the non-resident recipient had no PE in India, the amount is not taxable in India and no TDS under Section 195 is required. The issue is covered by a previous Division Bench judgment in the assessee’s own case. The respondent department argued that the Explanation to Section 9(1)(vi) inserted by Finance Act 2012 clarifies that any consideration paid to a non-resident for the use of equipment or process constitutes royalty, and therefore TDS under Section 195 is mandatory irrespective of taxability.

Payment for International Private Leased Circuits (IPLC) services to a non-resident company without a permanent establishment in India is not royalty under Section 9(1)(vi) of the Income Tax Act, 1961; Explanation 6 to Section 9(1)(vi) inserted by Finance Act 2012 is not retrospective and does not apply to payments prior to its insertion; therefore, no tax deduction at source under Section 195 is required.

It is equally difficult to accept the learned Additional Solicitor General's submission that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is clarificatory of the position as it always stood, since 1-6-1976... The view taken in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra) is that even if the assessee does not have an effective control over the equipment, the use of process will render payment liable to be treated as royalty was based on application of Explanations 4, 5 and 6 added by way of Finance Act, 2012... It was precisely on application of the newly inserted Explanations vide Finance Act, 2012, whereafter it became irrelevant whether or not the assessee has control or possession of the scientific equipment, that the claim of the assessee therein that payment made was for service and it was not a case of transfer was rejected. Therefore, to that extent, the decision in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra), in our considered opinion, stands overruled and cannot be relied upon as a precedent.

The assessee filed return for AY 2002-03 and claimed exemption under Section 10B. The Assessing Officer reduced the exemption by disallowing expenditure of Rs.5,42,18,347 paid to Sprint Communications, USA for IPLC services, treating it as royalty and citing Section 40(a)(ii) for non-deduction of TDS under Section 195. The Commissioner of Income Tax passed an order under Section 263 revising the assessment. The assessee’s appeal before the CIT(Appeals) and subsequently before the Income Tax Appellate Tribunal, Chennai Bench ‘A’ in ITA.No.1159/MDS/2007, was dismissed. Thereafter, the assessee filed the present tax case appeal under Section 260A before the High Court.

• Income Tax Act, 1961: 10B, 40(a)(i), 40(a)(ia), 143(3), 195, 260A, 263, 9(1)(vi)