ITO (International Taxation), CHENNAI V. M/s. Sify Ltd., CHENNAI

ITA 1277/CHNY/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57933 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-02-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 13-06-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: R VIJAYARAGHAVAN; S P CHIDAMBARAM S
• Section: 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NOS. 1277 & 1283/MDS/2008 A.YS 2002-03 & 2003-04 ASSESSEE BY : SHRI R. VIJAY ARAGHAVAN AND SHRI S.P. CHIDAMBARAM, ADVOCATES DEPARTMENT BY : SHRI K.E.B RENGARAJA N, JR. STANDING COUNSEL DATE OF HEARING : 02.02.2012 DATE OF PRONOUNCEMENT : 02.02.2012 THE INCOME-TAX OFFICER [INTERNATIONAL TAXATION] I(2) CHENNAI (APPELLANT) VS. M/S SIFY LIMITED 2 ND FLOOR, TIDEL PARK NO. 4, CANAL BANK ROAD TARAMANI, CHENNAI PAN NO. AAACS 9032 R (RESPONDENT 2 I.T.A. NOS. 1277 & 1283/MDS/2008 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER : THESE ARE APPEALS FILED BY THE REVENUE AGAINST THE CONSOLIDATED ORDER DATED 28.03.2008 OF COMMISSIONER OF INCOME TAX -XI, CHENNAI PASSED IN A.YS. 2002-03 AND 2003-0 4. 2. THE REVENUE HAS TAKEN NINE GROUNDS OF APPEAL AND THE SOLE GRIEVANCE OF THE REVENUE PROJECTED IN THESE GROUNDS OF APPEAL IS THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE TRANS ACTIONS IN RESPECT OF WHICH THE IMPUGNED PAYMENTS WERE MADE TO SIX NON -RESIDENT ENTITIES WERE PURELY ON ACCOUNT OF SERVICES AND NOT IN THE NATURE OF ROYALTY. 3. AT THE OUTSET, THE LD. D.R. SHRI K.E.B. RENGARJA N, APPEARING ON BEHALF OF THE REVENUE, VERY FAIRLY CONCEDED THAT TH E ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HONBLE DELHI HIGH COURT IN THE CASE OF ASIA SATELLITE TELE COMMUNICATION CO. LTD VS. DIRECTOR OF INCOME-TAX [2011] 332 ITR 304 [ DEL]. HOWEVER, 3 I.T.A. NOS. 1277 & 1283/MDS/2008 HE SUBMITTED THAT THE DECISION OF THE DELHI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF NEW SKY SATELLITE N.V. VS. ASSTT. DIRECTOR [INCOME-TAX] [2009] 319 ITR [AT] 269 [DEL] [SB} WAS NOT BROUGHT TO THE NOTICE OF THE HONBLE DELHI HIGH COURT AND THE SAME WAS NOT CONSIDERED BY THE HONBLE DELHI HIGH COURT WHILE DE CIDING THE ISSUE. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AS WELL AS THE CITED DECISION S. WE FIND THAT THE LD. CIT(A) HAS DECIDED THIS ISSUE BY OBSERVING AS UNDER: 6. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE RIVAL SUBMISSIONS AND ALSO EXAMINED THE ISSUES CAREFULLY WITH REFERENCE TO APPLICABILITY OF SEC. 1 95, WHICH HAS BEEN DENIED BY THE APPELLANT. THE APPELLA NT COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING NETWORKING AND E-COMMERCE SERVICES BY WAY OF INTERN ET. IN ORDER TO CARRY OUT ITS BUSINESS OF PROVIDING BRO ADBAND INTERNET CONNECTIVITY THE APPELLANT COMPANY HAS ENT ERED INTO AGREEMENTS WITH CERTAIN NON-RESIDENT COMPANIES . THE ASSESSEE THEREFORE MADE CERTAIN REMITTANCES IN 4 I.T.A. NOS. 1277 & 1283/MDS/2008 FOREIGN CURRENCY TOWARDS CONNECTIVITY CHARGES AND BANDWIDTH CHARGES WHICH ARE CALLED TELECOMMUNICATIO N CHARGES WITHOUT DEDUCTION OF TAX AT SOURCE. THE ASS ESSING OFFICER EXAMINED THE MATTER AND FOUND THAT THE EQUIPMENTS USED BY THE APPELLANT COMPANY THROUGH WH ICH CONNECTIVITY WAS PROVIDED ARE USED BY THE ASSESSEE. THEREFORE, IT TREATED THE PAYMENT AS ROYALTY FOR TH E USE OF THE EQUIPMENTS. CONSEQUENTLY, THE ASSESSING OFF ICER HELD THAT THE APPELLANT COMMITTED DEFAULT U/S 195 I N SO FAR AS IT HAD NOT DEDUCTED TAX AT SOURCE. HE THEREF ORE, WORKED OUT SHORT DEDUCTION OF TAX U/S. 201(1) AT RS.3,45,99,751/- AND RS.3,33,39,659/- FOR A.YS. 200 2-03 AND 2003-04 RESPECTIVELY. THE ASSESSING OFFICER ALS O CHARGED INTEREST U/S. 201(1A) AMOUNTING TO RS.1,99,6S,927/- AND RS.1,52,71,474/- FOR A.YS. 200 2-03 AND 2003-04 RESPECTIVELY. THE ASSESSING OFFICER HAS , THEREFORE, TAKEN THE FOLLOWING ARGUMENTS FOR RAISIN G THE IMPUGNED DEMANDS. (1) THE SERVICE PROVIDED BY THE TELECOMMUNICATION SERVICE PROVIDER IN THE CASE IS DIFFERENT FROM THAT PROVIDED BY THE NON-RESIDENT COMPANIES IN THE PRESENT CASE. (2) TELEPHONE IS FUNDAMENTALLY DIFFERENT 5 I.T.A. NOS. 1277 & 1283/MDS/2008 FROM A BANDWIDTH SERVICE. (3) THE BANDWIDTH SERVICE IS NOT A SPECIFIED SERVICE. (4) EQUIPMENT OF THE NONRESIDENT COMPANY THROUGH WHICH CONNECTIVITY IS PROVIDED IS USED BY THE ASSESSEE THE REQUISITE BANDWIDTH ALONG WITH EQUIPMENTS IS FOR EXCLUSIVE FOR THE ASSESSEE WHICH CANNOT BE USED BY OTHERS NOR BY THE NON-RESIDENT COMPANY; ON TERMINATION OF THE AGREEMENT THE ASSESSEE MUST CEASE TO USE THE SERVICE AND ALL EQUIPMENT OF THE NON-RESIDENT COMPANY. THUS THE PAYMENT BY THE ASSESSEE CAN BE TREATED AS ROYALTY FOR USE OF EQUIPMENT. THE ITO FURTHER ARGUED THAT CASE HAS TO BE DISTINGUISHED FROM THE CASE OF BSNL AND OTHERS VS. UNION OF INDIA (SUPREME COURT). IN THAT CASE THE SUPREME COURT DEALT WITH THE ISSUE OF USING STANDAR D FACILITY PROVIDED TO AN AVERAGE HOUSEHOLDER OR CONSUMER WHEREAS IN THE PRESENT CASE IT DEALT WITH PAYMENT FOR USE OF EQUIPMENT. 6:1. IN THE REPORT DATED 07-09-2007 THE ASSESSING OFFICER HAS REITERATED THE ARGUMENTS MADE IN THE 6 I.T.A. NOS. 1277 & 1283/MDS/2008 IMPUGNED ORDER. 6.2 ON THE OTHER HAND THE LEARNED AR HAS VEHEMENTLY ARGUED THAT THE LEARNED ASSESSING OFFICER HAS NOT P ROPERLY APPRECIATED THE FACTS OF THE CASE AND SUBMITTED THA T THE BANDWIDTH CHARGES ARE PROVIDED EITHER BY WAY OF UND ER- SEA CABLES OR BY SATELLITE EARTH STATIONS AND THE A PPELLANT DOES NOT HAVE ANY CONTROL OVER THE EQUIPMENTS AS IT HAS ONLY LEASED A PART OF THE TRANSPONDER CAPACITY AND NOT LEASED THE TRANSPONDER. THEREFORE, THE RIGHT OF' US E OF THE EQUIPMENT IS NOT EXCLUSIVELY WITH THE APPELLANT . FURTHER, THE RIGHT TO USE EQUIPMENT MAINLY ARISES I F THERE IS PHYSICAL EQUIPMENT AND SINCE THE EQUIPMENTS USED BY THE APPELLANT ARE NOT UNDER ITS CONTROL. THEREFORE, THE PAYMENTS MADE DO NOT HAVE THE CHARACTER OF ROYALTY. 6.3 ON THE ABOVE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, ONLY ONE QUESTION ARISES FOR DECISION WHETHER THE REMITTANCES MADE BY THE APPELLANT COMPANY TO THE FOREIGN PARTIES WOULD FALL WITHIN THE PURVIEW OF SE C. 195(1) WHICH REQUIRES DEDUCTION OF TAX AT SOURCE. BANDWIDTH IS BOUGHT AND SOLD TO CONSUMERS AND IT AC TS AS A CONDUIT ONLY. IN THE APPELLANT'S CASE THERE ARE N O EQUIPMENTS INSTALLED IN ITS PREMISES AND THE CONTRA CT ENTERED WITH THE FOREIGN PARTIES IS ONLY FOR THE SE RVICES. 7 I.T.A. NOS. 1277 & 1283/MDS/2008 MERE USE OF EQUIPMENT IN PROVIDING BANDWIDTH SERVIC ES WOULD NOT AMOUNT TO TRANSFER OF RIGHT TO USE. AS A MATTER OF FACT THERE ARE NO GOODS INVOLVED IN THE TRANSACT ION AND THE PAYMENTS ARE MADE ONLY FOR THE USE OF SERVICES. THE WORD' ROYALTY' AND ITS MEANING WAS INTRODUCED VIDE FINANCE ACT, 1976 AND WAS DEFINED UNDER EXPLANATION 2 TO SEC. 9(1)(I) WHICH WAS FURTHER EXPANDED TO INCLUDE 'THE RIGHT TO USE ANY INDUSTRIAL COMMERCIAL OR SCIENTIFI C EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SEC,. 44B. THE AMENDMENT WAS MADE BY FINANCE ACT, 2 001 BY INCORPORATING C1AUSE(IV A) W.E.F. 01-04-2002 I.E ., APPLICABLE FOR A.Y. 2002-03. IN SIMPLE WORDS, THERE FORE, ROYALTY MEANS THE PAYMENT OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF ' OR THE RIGHT TO USE, ANY COPY RIGHT OF LITERARY ARTISTIC OR SCIENTIFIC WORK BUT, DOES NOT INCLUDE THE WORDS 'USE' OR RIGHT TO USE, INDUSTRIAL , COMMERCIAL OR SCIENTIFIC EQUIPMENT. IN THE APPELLAN T'S CASE THERE IS NO 'RIGHT TO USE EQUIPMENT. THEREFORE , THE PAYMENTS MADE DO NOT FALL UNDER 'ROYALTY'. ON SIMIL AR FACTS THE ITAT, BANGALORE BENCH IN THE CASE OF ACIT VS. INFOSYS TECHNOLOGIES LTD. IN ITA NOS. 653 AND 969/BANG/2006 DATED 17-10-2007 HELD THAT ANY PAYMEN T MADE TO DATABASE OWNERS OUTSIDE INDIA FOR ACCESSING SUCH DATABASES AND THE SERVICES PROVIDED BY SUCH TELECOM OPERATOR TO THE CUSTOMERS DO NOT AMOUNT TO TECHNICA L 8 I.T.A. NOS. 1277 & 1283/MDS/2008 SERVICES OR ROYALTY U/S 9(1)(VII) OF THE IT ACT. AC CORDINGLY, IT WAS HELD THAT NO TDS IS TO BE MADE. THE HON'BLE TRIBUNAL ALSO HELD THAT PAYMENTS FOR ACCESSING DATA IS LIKE READING A BOOK IN A LIBRARY WHICH COULD NOT BE PASSED ON TO ANYONE ELSE. SINCE THE COPYRIGHT WAS NOT FOR LITERARY, ARTISTIC OR SCIENTIFIC WORK, THE PAYMENT IS NOT TO BE TREATED AS ROYALTY AND IT WAS HELD THAT NO TDS W AS REQUIRED TO BE MADE. THE HON'BLE ITAT, BANGALORE BE NCH IN THE CASE OF ITO VS. MADHURA COATS PVT. LTD., IN ITA NO. 1711 AND 1712JBANG/2005 FOR AYS. 2005-06 AND 2006-0 7 VIDE ORDER DATED 28-09-2006, RELYING ON THE DECISIO N OF THE APEX COURT IN THE CASE OF BHARAT SANCHAR NIGAM LTD., (SUPRA)' WHEREIN, IT WAS HELD THAT PROVIDING TELECO M SERVICES DO NOT FALL UNDER THE CATEGORY OF 'GOODS', THE HON'BLE ITAT HELD THAT PAYMENTS MADE FOR CONNECTIVI TY FOR TRANSMISSION OF DATA WOULD NOT FALL INTO THE CA TEGORY 'ROYALTY' OR 'FEES FOR TECHNICAL 6:4. IN VIEW OF THESE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE AND THE POSITION OF LAW SET OUT ABOVE, IT IS H ELD THAT THE TRANSACTIONS IN RESPECT OF WHICH THE IMPUGNED PAYMENTS WERE MADE WAS PURELY ON ACCOUNT OF SERVICE S AND THERE IS NO TRANSFER OF RIGHT TO USE THE GOODS. IN THE 9 I.T.A. NOS. 1277 & 1283/MDS/2008 RESULT, IT IS HELD THAT THE ASSESSING OFFICER WAS N OT JUSTIFIED IN TREATING THE PAYMENT AS ROYALTY AND IN VOKING THE PROVISIONS OF SEC. 195 FOR BOTH THE ASSESSMENT YEARS. CONSEQUENTLY, THE IMPUGNED ORDER U/S, 195 R.W.S. 20 1(1) AND 201(1A) DATED 21-03-2006 FOR A.YS. 2002-03 AND - 2003-04 IS CANCELLED. 6. ON A QUERY FROM THE BENCH FROM THE LD. D.R. AS T O WHETHER THERE IS ANY CONTRARY DECISION OF ANY OTHER HIGH CO URT, THE LD. D.R. REPLIED THAT THE HONBLE DELHI HIGH COURT DECISION IS A LONE DECISION ON THE ISSUE. 7. ON THE ABOVE FACTS, WHEN THERE IS ONLY ONE DECIS ION OF THE HIGH COURT, THEN THE SAME REQUIRES TO BE FOLLOWED B Y US. OUR VIEW FINDS SUPPORT FROM THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN CIT VS. GODAVARI DEVI SARAF [SMT] [1978] 113 ITR 58 9 [BOM] WE, THEREFORE, CONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE GROUNDS OF APPEALS OF THE REVENUE. 10 I.T.A. NOS. 1277 & 1283/MDS/2008 8. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN THE COURT AT THE CLOSE OF THE H EARING IN THE PRESENCE OF THE PARTIES ON 2 ND FEBRUARY, 2012. SD/- SD/- (GEORGE MATHAN) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 2 ND FEBRUARY, 2012. VL COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A), CHENNAI (4) CIT, CHENNAI (5) D.R. (6) GUARD FILE