Allsec Technologies Ltd., CHENNAI V. DCIT CORPORATE CIRCLE-1(1), CHENNAI

ITA 1985/CHNY/2019

AI Insights

The case involves Allsec Technologies Ltd., which appealed against the orders of the Commissioner of Income Tax (Appeals)-1, Chennai, concerning the disallowance of connectivity charges paid to TATA Communications UK Ltd. and TATA US. The primary legal issue was whether these payments constituted royalty and FTS, thereby necessitating TDS deduction under section 40(a)(i) of the Income Tax Act. The Tribunal examined the nature of the services provided under the agreements with TATA Communications and referenced judicial precedents, including the decision of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd vs. ITO, which supported the view that such payments are indeed royalty.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134923 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 03-01-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 01-07-2019
• Other Referred Cases: Verizon Communications Singapore Pte Ltd vs. ITO, Rackspace, US Inc. Vs. Dy. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Double taxation relief; Services rendered outside India; TDS
• Section: 6; 143(3); 195; 13

Judgement Text

आयकर अपीलीय अिधकरण, ‘बी’ यायपीठ, चे ई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: CHENNAI ी महावीर सह, उपा य एवं ी जी. मंजुनाथ, लेखा सद य के सम BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA Nos.1985, 1986, 1987/Chny/2019 & ITA No.04/Chny/2020 िनधा रण वष /Assessment Years: 2012-13 to 2015-16 Allsec Technologies Ltd., No.7H, Century Plaza, 560-562, Anna Salai, Chennai – 600 018. [PAN: AACCA-5106-G] Vs. The Dy. Commissioner of Income Tax, Corporate Circle-1(1), Chennai. ( अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/ Appellant by : Shri R. Vikram Vijayaraghavan, Advocate यथ क ओर से /Respondent by : Shri D. Hema Bhupal, JCIT सुनवाई क तारीख/Date of Hearing : 04.01.2023 घोषणा क तारीख /Date of Pronouncement : 11.01.2023 आदेश / O R D E R Per Mahavir Singh, Vice President : These four appeals by the assessee are arising out of the orders of Commissioner of Income Tax (Appeals)-1, Chennai, in ITA Nos.224, 190, 324/CIT(A)-1/2016-17 & 83/CIT(A)-1/2017-18 dated 29.03.2019 & 15.10.2019. The Assessments were framed by Joint Commissioner of Income Tax (OSD)/Dy. Commissioner of Income Tax, Corporate Circle-1(1), Chennai for the relevant Assessment Years 2012-13, ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 2 -: 2013-14, 2014-15 & 2015-16 vide his orders of dated 25.05.2016, 28.03.2016, 28.12.2016 & 29.11.2017, respectively u/s. 143(3) r/w s. 92CA of the Income Tax Act, 1961 (hereinafter ‘the Act’). 2. The only common issue in these four appeals by the assessee is as regards to the order of CIT(A) confirming the disallowance of connectivity charges paid by the assessee to TATA Communications UK Ltd. (TATA UK) and TATA US treating the same as Royalty and FTS for non deduction of TDS and disallowed by invoking section 40(a)(i) of the Act. For this, the assessee has raised the identical grounds in all the four years and the facts and circumstances are exactly identical in all the four years as admitted by both the sides. Hence, we will take the facts for A.Y 2013-14 in ITA No.1986/Chny/2019 and will decide the issue. The assessee raised the following effective grounds for the above issue. “2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of connectivity charges amounting to Rs.71,18,249/- paid to TATA Communications UK Ltd (TATA UK)., as Royalty and FTS for non-deduction TDS u/s40(a)(i). 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the payment made was not towards any rights to use nor the appellant made available any technical knowledge. The payment should not be treated as Royalty and FTS. Hence deduction of TDS u/s 40(a)(i) not called for.” 3. The brief facts of the case are that the assessee-company filed its return of income for the relevant A.Y 2013-14 on 29.11.2016. The ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 3 -: assessee-company is engaged in the business of Data & Call Centre for Export of services & Domestic BPO. The Assessing Officer (A.O) during the course of assessment proceedings noticed that the assessee has made payment with regard to connectivity charges paid the following charges: Name of the Party Amount paid in Rs. Novatel Ltd. 5009578 Tata Communications (UK) Ltd 7118249 TOTAL 12127827 4. The A.O required the assessee to furnish party wise break-up of the expenses debited in the P & L along with compliance to TDS provisions of Chapter XVII-B of the Act. The A.O on perusal of the details filed by the assessee, noticed that the assessee has not deducted TDS in regard to the above stated connectivity charges. Hence, he required the assessee to explain as to why the connectivity charges are not disallowed as these payments are subject to TDS. The assessee contended before the A.O that the above payments are not subject to TDS for the reason that the receipts have no business connection or permanent establishment in India and they are not covered u/s. 195 of the Act. The A.O rejected the argument of assessee and noted that the same is covered by Explanation 6 to s. 9(1)(vi) of the Act. According to him, the assessee is liable to deduct ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 4 -: TDS u/s. 195 of the Act as these payments are in the nature of royalty for which income accrues or arose in India, even though the deductee does not have any PE in India. Therefore, applying the provisions of s. 40(a)(i) of the Act disallowed the expenses of connectivity charges of Rs. 1,21,27,827/-. Aggrieved, the assessee preferred an appeal before CIT(A). 5. The CIT(A) deleted the addition in respect to Novatel Ltd., but upheld the disallowance in regard to TATA Communications (UK) Ltd. i.e., connectivity charges paid to TATA Communications (UK) Ltd. amounting to Rs. 71,18,249/- by observing as under: “In the case of TATA Communications (America) Inc., the appellant's submissions have been considered. The appellant had explained that these charges are regular business charges and cannot be considered as royalty. The appellant's explanations are not tenable as, the agreement between the appellant and TATA Communications provides for specialised and customised services to be rendered by the supplier to the customer pertaining to plant maintenance on customer's equipment. It was stated in para 3.3 of the Service Schedule to the said agreement that, if requested by... the customer, the supplier may at its option install certain customer-specified communications equipment and render miscellaneous services to the customer. The underlined principle laid down by the Jurisdictional High Court in the case of Verizon Communications Singapore Pvt. Ltd vs. ITO in Tax Case (Appeal) Nos.147 to 149 of 2011 and 23O of 2012 was that the IPLC services involves use of equipment and triggers equipment royalty taxation. Taking into account the nature of the service, the location of the equipment and the judicial pronouncements in this case, it is affirmed that the payments made to Tata Communications attract the provisions of section 195. The payments amounting to Rs.71,18,249/- paid to TATA Communications had been disallowed by the A.O. This disallowance is upheld. This ground of appeal is dismissed. ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 5 -: Aggrieved, the assessee came in appeal before Tribunal against the confirmation of disallowance of connectivity charges paid to TATA Communications (UK) Ltd. 6. Before us, the Ld. counsel for the assessee, Shri Vikram Vijayaraghavan, Advocate stated the facts that the assessee is operating an inbound and outbound call centre and is engaged in telemarketing services on behalf of its clients based in UK. The call centre executive sitting in the premises of the assessee makes outbound calls to UK on telephone members on potential customers or clients in the real time. In the process of calling by the executive to the person located in UK, the office data is converted into electrical data and is carried over by multiple entities. He explained that for the purpose of providing the services to its customers in UK, the assessee used the Co-location services and connectivity services provided by TATA UK for the purpose of connecting assessee with various customers in UK towards making the voice and data connectivity. The Ld. counsel for the assessee also drew out attention to assessee’s paper book Pgs. 50 to 75, wherein agreement between the customer or firm and invoice with TATA Communication UK and USA are enclosed. The Ld. counsel for the assessee, first of all, took us through ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 6 -: the agreement entered into with TATA Communication UK Ltd., he drew our attention to the service schedule of Co-location services and the Co-location terms and conditions given in Item-3 i.e., 3.1 to 3.3, which reads as under: “3.1 License. Customer will be granted a license to occupy the Colocation Space identified in a Customer Order Form accepted by Supplier. Customer shall be permitted reasonable access to the Colocation Space subject to any and all rules, regulations and access requirements as specified or imposed by Supplier governing such access. 3.2 Interconnection. Customer shall use the Colocation Space only for placement and maintenance of telecommunications or IT equipment. Such equipment may be interconnected to Supplier Service(s) or, with the prior written permission of Supplier, cross-connected to the facilities of other communications carriers (subject to those carriers' terms and conditions). 3.3 Remote Hands and Miscellaneous Services . Supplier shall endeavour to perform or shall procure to be performed such janitorial services, environmental systems maintenance, power plant maintenance and other actions as are reasonably required to maintain the Colocation Space in good condition an suitable for the placement of communications and Internet access equipment. At the Customer's request. Supplier may perform certain limited "remote hands" maintenance services on Customer's equipment within the Colocatiove Space or "escort services", which shall be performed in accordance with Customer's directions. Customer may be provided with "remote hands" maintenance services by purchasing this option for an additional fee as set forth in the Order Form. The "remote hands" service may include but is not limited to the following: (a) hard reboot of a server; (b) pushing a button or switching a toggle; (c) power cycling (e.g. turning off and on Customer Equipment); (d) observing or describing Customer Equipment indicator lights (physical observation of the server such as server LED status, power LED & occurrence of noises etc.): (e) basic observation and reporting of physical attributes on Customer's hosted Infrastructure; (f) changing pre-labeled Customer-provided tapes on an incidental basis; (g) securing or verifying cabling to connections; (h) cable organization, ties or labels usingCustomer-provided specifications (except cables of other services providers or any data circuits of Customer which is unmanaged and / or not under IDC Service Ops); (i) ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 7 -: modifying existing basic cable layout (such as Ethernet or FDDI connections! (i.e.swapping or changing the ports);(j)inserting Customer- provided media (CD/DVD) for application loading; (k) co-ordination with local vendors courier agencies for material to be accepted & to be sent back to Customer based on the RMA & vendor details/ provided by Customer (packing/unpacking & loading/unloading or shifting & rack mounting any such material shall be the responsibility of the Customer); (I) physical installation of new router cards without doing any configuration changes to Customer Equipment; (m) on line replacement of Customer-provided hardware components with Customer-provided spares (for the avoidance of doubt no off line activities will be performed);and (n) on line insertion of new or additional disk drives provided by the Customer (configuration of the added media shall be the responsibility of Customer). Supplier shall in no event be responsible for the repair, configuration or tuning of Customer Equipment or for installation of Customer Equipment (although Supplier will provide reasonable assistance for installation of such equipment at Customer's request). Under no circumstances shall the Supplier be responsible for any loss of service, data or equipment which results during and/or after execution of Customer's instructions as provided for remote hands support. The Colocation guidelines document should be adhered to for all details on Customer & Supplier roles & responsibilities and billing for remote hands support Service. Customer may be provided with "escort services", in which case Customer will pay the fees set out in the Order Form for such "escort services' (if any). Notwithstanding the foregoing, in all circumstances, Customer shall maintain the Colocation Space in a dean, orderly and safe condition, and shall return the Colocation Space to Supplier at the conclusion of the Term or upon termination in the same condition (reasonable wear and tear excepted) as when such Colocation Space was delivered to Customer. Except as expressly stated in any Customer Order Form, the Colocation Space shall be delivered and accepted "as is" by Customer, and no representation has been made by Supplier as to the fitness of the Colocation Space for Customer's intended purpose.” 7. The Ld. counsel relied on the decision of Co-ordinate Bench of Mumbai Tribunal in the case of Rackspace, US Inc. Vs. Dy. CIT in ITA Nos. 1634/Mum/2016 & others vide order dated 29.05.2019, wherein the Tribunal has considered the definition of ‘royalties’ as provided in the India USA Tax Treaty. Since Rackspace USA is providing hosting services to the Indian customers, it does not give any equipment or ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 8 -: control over the equipment. The term ‘use’ or ‘right to use’ for the purpose of the tax treaty entails that the payer has a possession/control over the property and/or the said property is at all its disposal. There is no privilege or right granted to the Indian customers over the servers and other equipments used to provide cloud hosting services. Further, it is held by the Bench that the equipments are not used by the customers and the same are used by Reckspace USA to provide service to the customers and hence, is held that the services provided by the Reckspace USA are in the nature of cloud hosting, data warehousing services etc., which are standard services provided to customers. Hence, the payments received on account of this cannot be called as a ‘royalty’. The Ld. counsel for the assessee also filed copy of India-US DTAA and also relied on the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. CIT in Civil Appeal NOs. 8733-8734 of 2018 (SC). 8. On the other hand, the Ld. Sr. D.R relied on the Jurisdictional High court decision in the case of Verizon Communications Singapore Pte Ltd. Vs. ITO [2014] 361 ITR 575 (Mad.) and stated that exactly identical issue was considered by Hon’ble Madras High Court and ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 9 -: considered that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through assured bandwidth the customer is guaranteed the transmission of the data and voice. He argued that the Hon’ble Madras High Court has also explained that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of the royalty. The Hon’ble High Court has considered the charges paid by assessee being for the use and the right to use of the process and held that to be royalty within the meaning of Clause (iii) of Explanation 2 to s. 9(1)(vi) of the Act. Hence, he argued that this issue is covered in favour of Revenue and against assessee by the decision of Hon’ble Jurisdictional High Court in the case of Verizon Communications Singapore Pte Ltd. Vs. ITO, supra. 9. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee-company is incorporated under the Companies Act and is engaged in the business of running a data and call centre for export of services and domestic BPO. The A.O noted that the connectivity charges in relation to TATA ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 10 -: Communications (UK) Ltd. and TATA Communications (USA) are in the nature of royalty in term of Explanation 2 to s. 9(1)(vii) of the Act. The CIT(A) also held, after perusing the agreement between the assessee and TATA Communications, noted that it provides for specialized and customized services to be rendered by the supplier to the customers pertaining to plant maintenance on customers equipment. The CIT(A) perused para 3.3 of the Services Schedule to the said agreement that, if requested by the customer, the supplier may at its option install certain customer specified communication equipment and render miscellaneous services to the customer. According to Ld. counsel, connectivity charges are in the nature of Co- location services provided by the TATA Communications, UK and TATA Communications, USA for the purpose of connecting the assessee with the various customers in UK towards making the voice and data connectivity. We noted that similar argument was placed before Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd. Vs. ITO, supra, wherein Hon’ble Madras High Court has finally discussed this issue and finally held that in Para 101 and 102 as under: “ 101. Although the assessee has submitted a voluminous paper book on case law, except for those that are discussed above, others were not touched by the assessee and hence we have not considered it ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 11 -: necessary to discuss these decisions. We may also note that except for making the submission on the question that the transaction is only a service and hence the consideration is not royalty, no arguments are made on permanent establishment or on the effect of the amendments. The assessee had submitted a detailed written submission on the clauses in the agreement and on the legal submissions. After considering the same, with reference to the arguments made by the learned senior counsel on the issue of royalty, vis-a-vis the agreement terms, we hold that the order of the Tribunal does not call for any interference. Although in his reply, learned senior counsel appearing for the assessee pointed out to Article 5 on permanent establishment to contend that VSNL is not an agent and hence cannot be construed as a permanent establishment of the assessee, no arguments are advanced on this account. In any event, in a virtual world, the physical presence of an entity has today become an insignifcant one; the presence of the equipment of the assessee, its rights and the responsibilities of the assessee, vis-a-vis the customer and the customers' responsibilities clearly show the extent of the virtual presence of the assessee which operates through its equipment placed in the customer's premises through which the customer has access to data on the speed and delivery of the data and voice sent from one end to the other. The Explanations inserted thus clearly point out that the traditional concepts relating to control, possession, location on economic activities and geographic rules of source of income recede to the background and are not of any relevance in considering the question under Section 9(1)(vi) read with Explanation 2. Thus, more so when it comes to the question of dealing with issues arising on account of more complex situations brought in by technological development by the use of and role of digital information, goods etc., the foreign enterprise does not need physical presence at all in a country for carrying on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given herein before. 102. In the circumstances, we reject the case of the assessee holding that the receipts are liable to be treated as 'royalty' for the use of IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly Article 12(3) of DTAA between India and Singapore. We also agree with the Tribunal that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer is guaranteed the transmission of the data and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is 'royalty' within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act.” ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 12 -: 10. We noted that from the above decision of Hon’ble High Court, which is a Jurisdictional High Court has clearly held that the use of the process was provided by the assessee whereby through assured bandwidth the customer is guaranteed the transmission of the data and voice. In such circumstances, it is held that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of the royalty as per Clause (iii) of Explanation 2 to s. 9(1)(vii) of the Act. The case law relied on by Ld. counsel of Co-ordinate Bench of Mumbai in the case of Reckspace, US Inc. Vs. Dy. CIT, supra, is clearly distinguishable from the decision of Hon’ble Jurisdictional High Court in the case of Verizon Communications Singapore Pte Ltd. Vs. ITO, supra, as Hon’ble Jurisdictional High Court has clearly held on similar facts as in the present case before us i.e., Co-location services and connectivity services provided for the process of connecting by the assessee with the various customers towards making voice and data connectivity. Hence, respectfully following the decision of Hon’ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd. Vs. ITO, supra, we confirm the action of the lower authorities and dismiss this issue of assessee’s appeal. ITA Nos.1985 to 1987/Chny/2019 & ITA No.04/Chny/2020 :- 13 -: 11. Similar of the facts and the issue is also same in other three appeals, taking a consistent view, we dismiss these three appeals also. 12. In the result, all the four appeals of the assessee are dismissed. Order pronounced on 11 th January, 2023. Sd/- Sd/- (जी. मंजुनाथ) (G. Manjunatha) लेखा लेखालेखा लेखा सद य सद यसद य सद य /Accountant Member (महावीर िसंह) (Mahavir Singh) उपा / Vice President चे ई/Chennai, दनांक/Dated: 11 th January, 2023. EDN/- आदेश क ितिलिप अ ेिषत/Copy to: 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF