DCIT Vs M/S. Personiv Contact Centres India (P) Ltd.

1. This appeal by the Revenue is directed against the order of ld. CIT (Appeals)-7, New Delhi dated 10.06.2019 pertaining to Assessment Year 2016-17.

2. The grounds of appeal taken by the Revenue read as under :-

“1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law, in deleting the addition of Rs. 2,50,67,8481- made by the Assessing Officer on account of disallowance u/s 40(a)(i) of the Income Tax Act, 1961 of the 'communication charges' paid to M/s TATA Communications/America) Inc(TATA INC), despite the fact that these payments were in the nature of 'Fees for Technical Services' as per the provisions of section 9(1)(vii) of the Income Tax Act, 1961?

2. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law holding that the 'communication charges' paid by the assessee to TATA INC would not be taxable under Indo-US DTAA, despite the fact that TATA INC made available process of transfer of calls from locations outside India to the business locations inside India and vice versa, which was squarely covered under Article 12(4)(b) of the Indo-US DTAA of the 'fee for included services' and was hence taxable under DTAA?

3. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law in allowing communication charges of Rs. 2,50,67,848/- paid to TATA INC, despite the fact that as per clarification received from Assistant Director(C-1), "Resources and Monitoring/Term Cell), Department of Telecommunication, M/s TATA INC did not possess unified license with applicable authorization from the DOT and hence was not legally permitted to provide any such telecom services in India and also it has not entered into any agreement with the assessee for providing any business facilities or services?

4. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law in allowing communication charges paid to TATA INC, relying upon the decision of Hon'ble High Court of Delhi in the case of CIT vs Bharti Airtel 175 Taxman 573(2008) and of Hon'ble ITAT in the case of the assessee despite the fact that the Hon'ble Supreme Court in the case of CIT(A) v. Bharti Cellular Ltd., (2014) 6 SCC 401 has directed the authorities to determine whether interconnection is a fully automated process or human intervention arises at some stage and how interconnection arrangement is managed in urgent situation when allotted capacity to a service provider is exhausted and hence the facts and circumstances of these cases were different from that of the assessee?

5. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred both on facts and in law in deleting the addition of Rs.40,452/- made by the Assessing Officer on account of disallowance on account of excess depreciation @60% claimed by the assessee on Aspect license-SW kit phone i.e. computer license, as the right to use the license is an intangible asset on which depreciation is allowable @ 25% and not 60% as claimed by the assessee?

3. Brief facts of the case are that in the order passed under section 143(3) of the Income-tax Act, 1961 (for short 'the Act'), AO assessed the income after the addition of Rs.2,50,67,848/- u/s 40(a)(i) of the Act on account of non-deduction of TDS and addition of Rs.40,452/- on account of excess depreciation claimed.

4. Against this order, assessee went in appeal before the ld. CIT(A). On the issue of addition of Rs.2,50,67,848/- u/s 40(a)(i) on account of non-deduction of TDS, ld. CIT (A) noted the submissions of the assessee. He found that the appeal was instituted on similar facts for AY 2013-14 which was decided by ld. CIT (A)-5 vide order dated 12.07.2018. After reproducing the order of ld. CIT (A) for AY 2013-14, ld. CIT (A) held that in the present appeal, facts are similar, hence following that order, he held that the addition of Rs.2,50,67,848/- u/s 40(a)(i) on account of non-deduction of TDS is deleted. We may gainfully refer to the order of ld CIT(A) dated 12.07.2018 for AY 2013-14, reproduced by the ld. CIT(A) in his order, as under :

"4.3. The main submission of the appellant was that the payment made is not subject to section 195 as it does not involve in income component arising to the non-resident company. The appellant has stated that the payment was for communication costs to the non-resident company and such company provided inbound and outbound facility to the appellant. The entire process was automated and did not involve any human intervention: The first contention raised by the appellant was based on the fact that since there was no income component in the payment made the liability u/s 195 to deduct TDS did not arise. This argument has been examined It is seen that the judgment of GE Technologies India Vis CIT has clearly laid down this premise that only where a payment to a non resident is assessable in India, the payer is bound to deduct tax on the same. If there is no income component in the sum paid to the non-resident liability of section 195 would not arise. The operative part of the judgment is as under:-

"9. One more aspect needs to be highlighted Section 195 falls in Chapter XVII which deals with collection and recovery. Chapter XVII-B deals with deduction at source by the payer. On analysis of various provisions of Chapter XVII one finds use of different expressions, however, the sum chargeable under the provisions of the Act" is used only in Section 195 For example, Section 194C casts an obligation to deduct TAS in respect of "any sum paid to any resident". Similarly, Sections 194EE and 194F inter alia provide for deduction of tax in respect of "any amount" referred to in the specified provisions. In none of the provisions we find the expression "sum chargeable under the provisions of the Act", which as stated above, is an expression used only in Section 1950. Therefore, this Court is required to give meaning and effect to the said expression. It follows, therefore, that the obligation to deduct TAS arises only when there is a sum chargeable under the Act. Section 195(2) is not merely a provision to provide information to the ITO(TDS). It is a provision requiring tax to be deducted at source to be paid to the Revenue by the payer who makes payment to a non-resident. Therefore, Section 195 has to be read in conformity with the charging provisions, i.e., Sections 4, 5and 9. This reasoning flows from the words "sum chargeable under the provisions of the Act" in Section 1950. The fact that the Revenue has not obtained any information per se cannot be a ground to construe Section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read Section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from Section 195(1). While interpreting a Section one has to give weightage to every word used in that section. While interpreting the provisions of the Income Tax Act one cannot read the charging Sections of that Act de hors the machinery Sections. The Act is to be read as an integrated Code. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of C.1. T. Vs. Eli Lilly & Co. (India) (P) Ltd [312 ITR 225] the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the I T. Act form one single integral, inseparable Code and, therefore, the provisions relating to TDS applies only to those sums which are "chargeable to tax" under the I T. Act. It is true that the judgment in Eli Lilly (supra) was confined to Section 192 of the I T. Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income "chargeable under the head salaries". Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum "chargeable tinder the provisions of the Act", which expression, as stated above, do not find place in other Sections of Chapter XVII. It is in this sense that we hold that the I T. Act constitutes one single integral inseparable Code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the I T. Act. "

4.4. In view of the clear ratio of the Supreme Court judgment the argument of the appellant that if there is no taxable amount in the payment made no liability u/s 195 arises. Now the basic issue is to examine as to whether the non-resident was taxable on a payments made by the Indian entity. The AO has examined the taxability of the same u/s 9 of the Income Tax Act. The appellant in his submission has stated that payments are not payment for technical services and therefore not subject to deduction of tax at source u/s 194J. The judgment of Skycell Communications has also been quoted wherein providing mobile or cellular telephone facility would not fall within the definition of FTS. The appellant has also relied on the judgment of Bharti Cellular 175 taxman 573 wherein it was held the payment in the nature of interconnection charges would be technical only if there was a human intervention and not otherwise .

“Before concluding we would also like to point out that the interconnect/port access facility is only a facility to use the gateway and the network of MTNL/other companies. MTNL or other companies do not provide any assistance or aid or help to the respondents/assessees in managing, operating, setting up their infrastructure and networks. No doubt, the facility of interconnection and port access provided by MTNL/ other companies is technical in the sense that it involves sophisticated technology. The facility may even be construed as a service in the broader sense such as a communication service. But, when we are required to interpret the expression technical service, the individual meaning of the words technical and services have to be shed, and only the meaning of the whole expression technical services has to be seen. Moreover, the expression technical service is not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions managerial service and consultancy service as appearing in Explanation 2 to Section 9(1)(vii) of the said Act. Considered in this light, the expression technical service would have reference to only technical service rendered by a human. It would not include any service provided by machines or robots."

The aforesaid principle of human interface was upheld by the H'bl Supreme Court in appeal while it referred the matter back to lower authorities to factually determine as to whether there was any human intervention. No human intervention has been brought on record in the present case. Further the Delhi Tribunal has also held that specifically inter connected usage charges paid by Bharti Airtel to a foreign telecom operator do not constitute FTS and do not arise or accrue in India.

"73. The undisputed fact is that none of the operations of the FTOs are in India. The call is delivered outside India and is carried and terminated outside India. Under these circumstances, the question is whether the FTO is liable to pay tax on the income derived by it, on the ground that, the income is received or is deemed to have been received in India or on the ground ITA Nos. 3593 TO 3596/Del/2012 [Bharti Airtel Ltd vs. ITO(TDS)) & ITA Nos. 4076 TO 4079/De1/2012 [ITO(TDS) vs. Bharti Airtel Ltd] that, the income accrues or arises in India or is deemed to accrue or arise in India, during the relevant year. On facts, it is clear that Section 5(2)(a) is not applicable, as the payments were neither received nor deemed to have been received by the 'FTOs' in India. The first part of Section 5(1)(2)(b) is also not applicable. Hence, we have to test the receipts, as per the deeming provisions contained in the I T Act i.e. whether the receipt in question can be deemed to accrue or arise in India, u/s. 9, read with section 5(2)0) of the Act. 74. The payment in question does not accrue or arise to the 'FTOs', through or from any property of the 'FTOs' in India or from any asset or source of income of the 'FTOs' in India or through the transfer of any capital asset of the 'FTOs' in India. The entire business operations are carried out outside India by the FTOs. Under these circumstances, the proposition of law laid down in the judgment of the Hon'ble Jurisdictional High Court in the case of Asia Satellite Communication 'Company Ltd (Supra) applies in this case. Hence, no income is deemed to accrue or arise to the FTO's in India.

4.5 The appellant has further discussed the taxability under the double taxation avoidance agreement between India and US. The relevant provision of article 12 of D TAA has been quoted It has been argued that the services rendered do not make available in technical knowledge to the recipient of services.

4.6. The entire argument of the appellant have been considered The AO's order and the reasons recorded for making the addition have also been examined It is clear that for the provisions of section 40(a)(ia) to apply the amount paid should have a component of taxability. in the present case the payment is made for communication charges. The charges as apparent from the invoices produced by the appellant are inter connection charges paid to the non-resident to enable a direct call and facility from the Indian customer to the client in United States. Further a client in the US is also enable through such inter connection to dial a subscriber in India. The basic process involved does not apparently have human inter phase. The assessing officer in his assessment has also not commented that whether the human inter phase can be established or not, even though this was one of the basic provisions sought in remand Interconnected charges per se therefore had been held technical services. Further the payment is made to a non- resident the taxability is to be considered under DTAA, since the recipient is stated to be a tax - resident of us. The DTAA clearly lays out the scope of fee for included services in article 12. The article 12 is reproduced hereunder :-

"ARTICLE 12

ROYALTIES AND FEES FOR INCLUDED SERVICES

1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State,' but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

3. The term "royalties" as used in this Article means:

4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

5. Notwithstanding paragraph 4, "fees for included services", does not include amounts paid:

4.7. The article 12(4)(b) clearly states that for in service to be classified as an included service the technical knowledge should be made available to the recipient or as to enable him to apply the technology to be used In the present case the communication charges are being paid for inter communication services. These can in no manner be seen to make available in knowledge to the recipient of the service that is the appellant in this case. In the absence of any knowledge being available the consideration being paid cannot fall within the definition of fee for included services. Therefore, the amount would not be taxable under DTAA. The services under the domestic legislation also do not constitute technical services specifically in view of decision of CIT vs. Bharti Airtel of the Delhi High Court which was in principle agreed to by the H'bl Supreme Court. In view of these facts and the clear judicial mandate of the jurisdictional High Court the communication charges paid would not constitute fee for included services in the hands of the recipient. As a result the amount received by the company which is a non-resident is not taxable under the act or the treaty. Once the same (the payment made) does not include any taxable amount no liability u/s 195 arises. The disallowance u/s 40(a)(ia) is therefore not warranted

4.8. The AO in his remand report has further submitted that the services sought by the appellant were from M/s Tata Incorporated, US. The AO indicates that as per the guidelines of Department of Telecommunications. The telecom resources have been provided by an entity (Tata Communications, America) who did not have requisite license to provide the services in India. It has been submitted by the appellant that the services being rendered by the non- resident company at the foreign end and not at the Indian end The license required is for a case where the point of presence is in India. Without going into detailed technicalities requirement it is seen that the terms and conditions of the DOT are prima facie not relevant to the taxability of the same being paid The appellant has taken some services which are inter connection services from an entity in Us. The sum paid to the US entity is not taxable in India. This fact per se is sufficient to insulate the assessee from the provisions of section 40(a)(ia). In view of the above discussion, the addition of Rs.1,52,72,504/- on account of communication charges paid is hereby deleted.”

5. Against this order, Revenue is in appeal before us. We have heard both the parties and perused the records.

6. Ld. Counsel for the assessee contended that the issue is covered in favour of the assessee by a series of orders as under :-

(i) ITA No. 3328 to 3332/D/2015 Assessment years 2007-08 to 2011-12 M/s. Tata Teleservices Ltd. v. ITO

(ii) ITA No. 1417/2018 (Del) CIT v. Tata Teleservices Ltd.

(iii) 383 ITR 1 ( SC) CIT v. Kotak Securities Ltd.

(iv) 290 CTR 436 (Kar) CIT v. Vodafone South Ltd.

(v) 194 ITD 253 (Del) Autoliv ASP Inc. v. DCIT

(vi) 251 ITR 53 (Mad) Skycell Communications Ltd. v. DCIT

(vii) 319 ITR 139 (Del) CIT v. Bharti Cellular Ltd.

(viii) 392 ITR 186 (SC) DIT (International Taxation) v. AP. Moller Maersk A/S

(ix) 117 TTJ 456 (Del) Millennium Infocom Technologies Ltd. v. ACIT

(x) 118 taxmann.com 2 (Mum) Edenred Pte. Ltd. v. Dy. DIT(IT)

(xi) 182 ITD 526 (Bang.) Edgeverve Systems Ltd. v. Dy. Asstt. CIT (IT)

(xii) 173 DTR 308 (Pune) EPRSS Prepaid Recharge Services India (P.) Ltd. v. ITO

7. Further, ld. Counsel of the assessee contended that now similar issue has also been dealt with by Hon’ble Delhi High Court in the case of CIT (TDS) vs. Tata Teleservices Ltd. in ITA 1417/2018 vide order dated May 30, 2022. The question before the Hon’ble High Court was, “Whether the ITAT was correct in holding that no TDS under section 194J of the Income Tax Act was required to be deducted by the assessee on payment of interconnect user charges as it could not be categorized as fee for technical services?” Hon’ble High Court has noted that Hon’ble Karnataka High Court in the case of CIT, TDS, Bangalore vs. Vodafone South Ltd. 2016 (72) taxmann.com 347 (Karnataka) has decided the aforesaid issue in favour of the respondent-assessee. After some discussion, the Hon’ble Delhi High Court concluded as under :-

“7. Admittedly, the Karnataka High Court and various Tax Tribunals have taken the view that there is no human intervention involved in providing the Interconnect services whether it be for data link or roaming.

8. The Supreme Court in Berger Paints India Ltd. vs. Commissioner of Income Tax, (2004) 135 Taxman 586 has held that if the revenue has not challenged the correctness of the law laid down by the High 'Court and has accepted it In the case of one assessee, then it Is not open to the revenue to challenge its correctness in the case of other assessee without just cause.

9. Keeping in view the aforesaid mandate of law and the letter dated 21st April, 2022, this Court is of the view that the appellant-revenue has consciously elected not to challenge the aforesaid judgment of the Karnataka High Court, which hold that no TDS is required to be deducted by the assessee on payment of interconnect user charges as it cannot be categorized as fee for technical services.

10. Consequently, this Court is of the view that it is not open to the revenue to challenge the correctness of the finding rendered by the Karnataka High Court In Vodafone South Ltd. (supra) in the case of other assessees without just cause. Accordingly, no substantial question of law arises for consideration in the present appeal and the same is dismissed.”

8. Since facts in the present case are not disputed and respectfully following the precedent, we do not find any infirmity in the order of ld. CIT(A), hence we uphold the same. Moreover, it is also not the case that last year’s CIT (A) order relied upon by him has been reversed.

9. Apropos the issue of disallowance of an amount of Rs.40,452/-being excess depreciation claimed, ld. CIT (A) noted the AO’s contention that assessee has taken license which allows the assessee to use that particular right on payment of certain amount and that being an intangible asset on which depreciation is allowable @ 25% only. Ld. CIT (A) noted that ld. CIT (A) in AY 2013-14 vide order (supra) in assessee’s own case granted the relief to the assessee holding that depreciation on a limited user license is eligible @ 60%. Ld. CIT (A) quoted the order of AY 2013-14 and held as under :-

“3.3. I have given careful consideration to the submissions made and examined the invoices in question. The invoices indicate that Central Sales Tax has been paid on the product in question which clearly indicates that impugned purchase is of a product. The nomenclature 'license' that has been used in the invoices refers to the 'limited user license' paid to the vendor AGC Network Ltd., formerly Avaya Global Connect Ltd It is common knowledge that many of the office products such as Windows 2008 to 2010 are sold by Microsoft under limited user license, which clearly means that the use has limited and restricted right to use the software. It cannot mean that every licensed software product, user of which is permitted u/s 52 of the Copyright Act, is a license which would enable the user the commercially exploit the intellectual property for earning income. The appellant is also seen to be engaged in the business of providing software services but it has no income from royalty which would be possible earned from the commercial exploitation of license. The accounts of the appellant company are also subject to the Audit and the Auditor has considered these software as an integral part of computer eligible for depreciation @ 60% as per Annexure - TI' to the Tax Audit Report. Thus the software purchased by the appellant is in the nature of limited user license which are off the shelf software products and do not fall under the category of intangible assets. The Spl. Bench ITAT in the case of Anyway India Enterprises (supra) the Hyderabad ITAT in the case of Ushodaya Enterprises (supra) the Delhi High Court in the case of BSES Rajdhani Powers Ltd Have also held that upto the accessories and peripherals such as printers, scanners and server etc. Form an integral part of the computer system and are entitled to depreciation. Based on the judicial precedents and on the facts of the case, it is held that since the appellant has limited rights over the software, it cannot be characterized as an intangible asset but form an integral part of the computer system which is entitled to depreciation @ 60%. Ground No.2 is allowed."

4.3. Following the aforesaid decision appellant is granted relief on this ground. The software is, therefore, eligible for depreciation at the rate of 60%. The disallowance of Rs.40,452/- as excessive depreciation claimed, is directed to be deleted. This ground of appeal is ruled in favour of the appellant.”

10. Against this order, Revenue is in appeal before us. We have heard both the parties and perused the records.

11. We note that ld. CIT (A) has considered earlier year’s order in assessee’s own case wherein appropriate case laws have been relied upon. No distinguishing facts have been produced by the ld. DR for the Revenue. Hence following the precedent, we do not find any infirmity in the order of the ld. CIT (A) and uphold the same.

12. In the result, the appeal of the Revenue stands dismissed.