ITO, Ward-3(3), Hyd, Hyderabad V. SMS Country Net Works Pvt.Ltd., Hyd, Hyderabad

ITA 1197/HYD/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2417 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 09-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GITENDAR MANN
• Assessee Lawyers: R PRASAD
• Keywords: Deemed to accrue or arise in india; Non-deduction of tax
• Section: 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1196 AND 1197/HYD/2015 ASSESSMENT YEARS: 2011-12 & 2012-13 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(2), HYDERABAD. VS. SMS COUNTRY NETWORKS PVT. LTD., HYDERABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SMT. GITENDAR MANN ASSESSEE BY : SHRI M.S.R. PRASAD DATE OF HEARING 13/02/2018 DATE OF PRONOUNCEMENT 21/03/2018 O R D E R PER S. RIFAUR RAHMAN, A.M.: BOTH THESE APPEALS FILED BY THE REVENUE ARE DIRECT ED AGAINST THE ORDERS OF CIT(A) 3, HYDERABAD RELATING TO AYS 201 1-12 AND 2012- 13. SINCE IDENTICAL ISSUES ARE INVOLVED IN BOTH THE SE APPEALS, THEY WERE CLUBBED AND HEARD TOGETHER AND THEREFORE A COM MON ORDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2. BRIEFLY THE FACTS OF THE CASE AS TAKEN FROM AY 2 011-12 ARE, ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF PROVIDI NG OF BULK SHORT MESSAGE SERVICES (SMS) TO THE SUBSCRIBERS LOCATED I N INDIA AND OUTSIDE INDIA FILED ITS RETURN OF INCOME FOR THE AY 2011-12 ON 29/09/2011 DECLARING A NET INCOME OF RS. 37,73,454/ -, WHICH WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 (I N SHORT THE ACT). SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY UN DER CASS AND NOTICES U/S 143(2) AND 142(1) WERE ISSUED AND SERVE D ON THE 2 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. ASSESSEE CALLING FOR INFORMATION. IN RESPONSE TO TH E SAID NOTICES, THE AR OF THE ASSESSEE FURNISHED THE INFORMATION AS CAL LED FOR. 2.1 THE AO OBSERVED THAT DURING THE YEAR, ASSESSEE COMPANY MADE THE FOLLOWING PAYMENTS TO NON-RESIDENT COMPANIES FO R USE OF MOBILE NETWORK TERMINATION & INTERCONNECTION OF SERVICE PR OVIDERS LOCATED OUTSIDE INDIA FOR DELIVERY OF SMS TO CUSTOMERS OUTS IDE INDIA: SL. NO. NAME OF THE PARTY AMOUNT PAID AMOUNT ON WHICH TDS DEDUCTED BALANCE 1 TYN TECH LTD. 13,77,407 1,98,117 11,79,290 2 MICRO OCEAN TECHNOLOGIES SDN, BHD 15,80,380 2,94,916 12,85,464 3 CLX NETWORKS AB 2,80,522 0 2,80,522 4 SILVER STREET BV 13,99,205 5,25,425 8,73,780 5 FCC FINANCE, KUWAIT 25,35,622 0 25,35,622 6 HSL 6,65,525 2,25,145 4,40,380 7 PREPAID MACH 12,23,248 0 12,23,248 8 SMS COUNTRY NETWORKS FZE 8,13,174 0 8,13,174 TOTAL 98,75,083 12,43,603 86,31,480 2.2 THE AO OBSERVED THAT AS PER THE PROVISIONS OF S ECTION 195, THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON TH E PAYMENTS TO THE ABOVE NON-RESIDENT PARTIES. AS THE ASSESSEE FAI LED TO DEDUCT TDS AS REQUIRED U/S 195, THE AO DIRECTED THE ASSESSEE T O SHOW CAUSE AS TO WHY THE EXPENDITURE OF RS. 86,31,480/- SHOULD NO T BE DISALLOWED U/S 40(A)(IA) OF THE ACT. IN RESPONSE, THE ASSESSEE FILED A REPLY ON 28/01/2014 WHEREIN IT WAS SUBMITTED THAT THE COMPAN Y MADE CERTAIN PAYMENTS TO NON-RESIDENTS LOCATED OUTSIDE INDIA TOW ARDS SMS TERMINATION, INTERCONNECT AND PORT CHARGES FOR DELI VERY OF SMS TO MOBILE NETWORKS LOCATED OUTSIDE INDIA. THESE SMS AR E GENERATED FROM OUTSIDE INDIA ONLY AND THE PAYMENTS FOR THESE ARE RECEIVED THROUGH PAYPAL PAYMENT GATEWAY. THE COMPANY USES TH E MOBILE NETWORK TERMINATION AND INTERCONNECTIVITIES OF THE SERVICE PROVIDERS 3 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. LOCATED OUTSIDE INDIA FOR SMS DELIVERY TO THE CUSTO MERS OUTSIDE INDIA. THE PAYMENT MADE BY THE COMPANY IS TOWARDS USE OF T HESE MOBILE NETWORK GATEWAYS OF THE SERVICE PROVIDERS, WHO ARE LOCATED OUTSIDE INDIA. PAYMENTS MADE TOWARDS INTERCONNECT OR PORT C HARGES DO NOT FALL WITHIN THE EXPRESSION OF 'FEE FOR TECHNICAL SE RVICES' AS HELD IN THE CASE OF SKYCELL COMMUNICATION LTD VS. DEPUTY COMMIS SIONER OF INCOME TAX (2001) 251 ITR 53, MADRAS HIGH COURT. FU RTHER, THE ASSESSEE IS ALSO RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS BHARATI CELLULAR LTD (2008) 319 ITR 139. AS THE SERVICE PROVIDERS DO NOT HAVE PERMANENT ESTABLISHME NT IN INDIA AND THE PAYMENT IS NOT FOR FEE FOR TECHNICAL SERVICES, NO TDS IS REQUIRED U/S 195. 2.3 THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND PERUSING THE AGREEMENT BETWEEN THE ASSESSEE AND NON -RESIDENT PROVIDERS, OBSERVED THAT THE PAYMENTS MADE BY THE A SSESSEE TO NON- RESIDENTS ARE IN THE NATURE OF FEE FOR TECHNICAL SE RVICES AND SUCH PAYMENTS WERE THE DEEMED INCOME SECTION 9(1)(VII) O F THE INCOME TAX ACT, 1961. HE FURTHER OBSERVED THAT THE EXPLANA TION TO SUB- SECTION (2) OF SECTION 9, INCOME OF A NON-RESIDENT SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSE (VII) OF SECT ION 9(1), WHETHER OR NOT THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BU SINESS OR BUSINESS CONNECTION IN INDIA OR THE NON-RESIDENT HAD RENDERE D SERVICES IN INDIA. HE, THEREFORE, APPLYING THE PROVISIONS OF SE CTION 195 DISALLOWED THE ENTIRE EXPENDITURE OF RS.86,31,480 UNDER SECTIO N 40(A)(IA) OF THE INCOME-TAX ACT, 1961, ON ACCOUNT OF THE ASSESSEE'S FAILURE TO DEDUCT TAX U/S 195 ON THE PAYMENTS MADE TO THE NON-RESIDEN TS. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE PR EFERRED AN APPEAL BEFORE THE CIT(A) AND SUBMITTED THAT THE SER VICES PROVIDED BY NON-RESIDENT COMPANIES CANNOT BE CONSIDERED AS FEE FOR TECHNICAL SERVICES AS NO HUMAN INTERVENTION IS INVOLVED IN P ROVIDING SUCH SERVICES. FURTHER, IT WAS SUBMITTED THAT THE NON RE SIDENT COMPANIES ARE DOING BUSINESS IN DIFFERENT FOREIGN COUNTRIES A BROAD, THEREFORE, 4 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. THEIR INCOME IS NOT TAXABLE IN INDIA, THEREFORE, PR OVISIONS OF SECTION 195 ARE NOT APPLICABLE. HE RELIED ON THE FOLLOWING CASES: 1. SKYCELL COMMUNICATION LTD, 251 ITR 53 (MAD) (HC ) 2. BHARATI CELLULAR LTD., 319 ITR 139 (DEL) (HC) 3. M/S VELTI INDIA PVT. LTD., ITA NO. 1030/MDS/201 3 (MAD) (ITA). 4. THE CIT(A) RELYING ON THE DECISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF M/S VELTI INDIA PVT. LTD. (SUPRA) AN D THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHN OLOGY CENTRE PVT. LTD., VS. CIT, [2010] 327 ITR 456, HELD THAT T HE AMOUNTS PAID BY THE ASSESSEE TO NON-RESIDENT COMPANIES FOR THE PURP OSE OF TRANSMITTING BULK SMS ABROAD CANNOT BE CONSIDERED A S TECHNICAL SERVICES, THEREFORE, NOT LIABLE TO TDS U/S 195 AND ACCORDINGLY DELETED THE DISALLOWANCE MADE U/S 40(A)(IA) BY THE AO. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT (A) ERRED BOTH IN LAW AND ON FAC TS OF THE CASE. 2. THE LEARNED CIT (A) ERRED IN DELETING THE ADDITI ON MADE OF RS. 86,31,480/- BY THE ASSESSING OFFICER U/S 40(A)( IA) OF THE ACT, ON THE GROUND THAT THERE IS NO HUMAN INTERVENT ION AND THE AMOUNTS PAID TO NON-RESIDENT COMPANIES DO NOT FALL IN THE AMBIT OF SECTION 195 OF THE ACT, DESPITE OF THE FACT THAT THE ASSESSING OFFICER HAD MADE SUCH DISALLOWANCE BASING ON THE AG REEMENTS ENTERED INTO WITH THE SERVICE PROVIDED AS PER WHICH THE SERVICES PROVIDED INVOLVE HUMAN INTERVENTION. 3. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIM E OF HEARING. 6. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE DISPUTE IS ONLY WITH REFERENCE TO THE P AYMENTS MADE TO NON-RESIDENT COMPANIES. THE ASSESSEE MADE PAYMENTS TO THE TUNE OF RS. 98,75,083/- TO NON-RESIDENT COMPANIES, OUT OF T HIS TDS WAS DEDUCTED ON RS. 12,43,603/-. NO TDS WAS DEDUCTED ON PAYMENTS MADE OF RS. 86,31,480/- IN ACCORDANCE WITH THE ADVI CE GIVEN BY THEIR CONSULTANTS. THE MAIN CONTENTION OF THE REVENUE IS THAT THE SERVICES 5 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. PROVIDED BY THE NON-RESIDENT INVOLVE HUMAN INTERVEN TION AND FALLS WITHIN THE AMBIT OF SECTION 9(I)(VII) OF THE ACT. T HE BASIS FOR SUCH CONTENTION IS THE AGREEMENT ENTERED BY THE ASSESSEE WITH HAY SYSTEMS LTD. (HSL) AND ITS OWN SUBSIDIARY IN UAE. IN THESE AGREEMENTS, THE OBLIGATIONS OF SUCH NON-RESIDENTS A RE: 3. OBLIGATION OF HSL: HSL SHALL 3.1 PROVIDE THE SERVICES WITH REASONABLE SKILL AND CARE AND USING SUITABLY SKILLED AND APPROPRIATELY EXPERIENCED PERSONNEL. 3.2 USE ALL REASONABLE ENDEAVOURS TO PROVIDE THE SERVICES IN ACCORDANCE WITH ANY TIMESCALES AS MAY BE AGREED BETWEEN THE PARTIES. 6.1 AS PER THE ABOVE AGREEMENT, THE NON-RESIDENTS I N THE SERVICES PROVIDERS ARE TO PROVIDE SERVICES WITH REASONABLE S KILL AND CARE BY USING SUITABLY SKILLED AND APPROPRIATELY EXPERIENCE D PERSONNEL. ALSO IT SHOULD BE PROVIDED WITHIN TIMESCALES AGREED BETWEEN PARTIES. THIS REQUIREMENT OF SKILLED PERSONS IS TO PROVIDE THE SE RVICES OR TO HAVE MINIMUM QUALIFICATION TO GET HIRED TO MONITOR THE S ERVICES. WHAT IS RELEVANT IS, WHETHER ANY HUMAN INTERVENTION IS REQU IRED IN TRANSMITTING THE SMS SERVICES, WHICH IS THE MAIN ACTIVITY BETWEE N THE PARTIES. AS PER THE ABOVE AGREEMENT, THE SERVICES ARE DEFINED I N SCHEDULE PART 3, AS PER WHICH THE SMS CARRIER SERVICES, ARE: SMS MESSAGING SERVICES 1. SMS CARRIER SERVICES 1.1 HSL CONTRACTS TO PROVIDE MOBILE MESSAGING SERVI CE TO THE CUSTOMER. 1.2 ACCESS IS PROVIDED TO THE CUSTOMER TO THE SMS GATEWAY OPERATED BY HSL FOR COMMUNICATING MESSAGES BETWEEN THE COMPUTER SYSTEM OF THE CUSTOMER OR SYST EMS ACTING ON BEHALF OF THE CUSTOMER AND MOBILE DEVICES USING THE SHORT MESSAGE SERVICE (SMS) 6 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. 1.3 ACCESS TO HSLS SMS GATEWAY WILL BE USING THE INTERNET. 1.4 THE METHOD BY WHICH THE CUSTOMERS SYSTEMS WILL COMMUNICATE WITH HSLS SMS GATEWAY IS THE SMPP (SHO RT MESSAGE PEER TO PEER) PROTOCOL AS DEFINED BY THE SM S FORUM AND SUPPORTED AS DECLARED IN SMS CARRIER SMPP ABBREVIATED PACS DOCUMENT PUBLISHED AT HTTP:/WWW.SM S CARRIER.COM. 1.5 SUPPORT FOR SMS SPECIFIC FEATURES SUCH AS DELIV ERY RECEIPTS. UDHI AND 8-BIT DATA ARE PROVIDED FOR ALL NETWORKS IN ALL COUNTRIES LISTED AT HTTP:/WWW.SMSCARRIER.COM./COV-PRICING HTML. 6.2 FROM THE ABOVE, IT IS CLEAR THAT, IT IS CONTRAC T TO PROVIDE MOBILE MESSAGING SERVICES, ACCESS PROVIDED TO THE SMS GATE WAY OPERATED BY HSL FOR COMMUNICATING MESSAGES BETWEEN THE COMPU TER SYSTEM OF THE CUSTOMER AND MOBILE DEVICE, ACCESS TO SMS GATEW AY OPERATED BY HSL BY USING INTERNET AND COMMUNICATION WITH THE HELD OF SMPP. IT SHOWS THAT THE SERVICES OFFERED BY THE HSL ARE PURE LY SYSTEM TO SYSTEM. IN THE DELIVERY OF SMS, ONLY THE SYSTEMS AR E UTILIZED AND NOWHERE IN THE PROCESS OF AGREEMENT, IT IS HIGHLIGH TED THE INVOLVEMENT OF ANY PERSONNEL. IT SHOWS THAT THERE IS NO REQUIRE MENT OF HUMAN INTERVENTION IN TRANSMITTING THE SMS EXCEPT EMPLOYM ENT OF QUALITY PERSONNEL. THEREFORE, THE RATIO OF DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHARATI CELLULAR LTD. , [2009] 319 ITR 139 (DELHI) IS RELEVANT, WHICH HAS CLEARLY EXPLAINED TH E TRANSMISSION THROUGH SYSTEMS ARE OUTSIDE THE PURVIEW OF TECHNIC AL SERVICES, WHERE THERE IS NO INTERVENTION OF HUMANS. THEREFORE, WE A RE IN AGREEMENT WITH THE FINDINGS OF LD. CIT(A) AND ACCORDINGLY, UP HOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND RAISED BY REVENUE. 6.3 AS THE ISSUE IN AY 2012-13 IS MATERIALLY IDENTI CAL TO THAT OF AY 2011-12, FOLLOWING THE CONCLUSIONS DRAWN THEREIN, W E DISMISS THE APPEAL IN AY 2012-13 ALSO. 7 ITA NO. 1196 & 1197/HYD/2015 SMS COUNTRY NETWORKS PVT. LTD.. 7. IN THE RESULT, BOTH THE APPEALS OF REVENUE ARE D ISMISSED. PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH, 2018. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 21 ST MARCH, 2018 KV COPY TO:- 1) DCIT, CIRCLE 3(2), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 2) M/S SMS COUNTRY NETWORKS PVT. LTD., PLOT NO. 2 & 3, 2 ND FLOOR, EKTHA TOWERS, WHITE FIELDS, OPP. BOTANICAL GARD ENS, KONDAPUR, HYDERABAD 500 084 3) CIT(A) 3, HYD. 4) PR. CIT 3, HYD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE