By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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New Page 19 DCIT
v. M/s. Estel
Communications Pvt. Ltd. (Delhi ITAT) (Unreported)
S. 9(1)(vii), S. 40(a)(i), S. 195
of the Act
A.Y. : 2003-04. Dated : 10-3-2008
Issue :
Disallowance u/s.40(a)(i) of the Act for
non-deduction of tax u/s.195 of the Act from payments made for purchase of
internet bandwidth and TDS.
Facts :
The assessee-company had entered into a reseller
agreement with a non-resident company. In terms of the agreement, the
non-resident company was to provide various internet services on non-exclusive
basis to the assessee-company for resale of these services to the end-user
customers in the territory. The Internet services pertained to provisions of
bandwidth with certain minimum performance speed. The privity of contract was
between the assessee-company and the non-resident company and there was no
privity of contract between the non-resident company and the end-user customers.
In terms of the agreement, the assessee-company had made certain payments to the
non-resident company. While making the payments, the assessee-company had not
deducted any tax at source. According to the AO, the assessee-company was
required to deduct tax u/s.195 of the Act, but since it had not deducted the
tax, he disallowed such payments u/s.40(a)(i) of the Act.
In the assessee-company’s appeal before him, the
CIT(A) observed that the issue was identical to the decision in Wipro Ltd. v.
ITO, (2003) 80 TTJ 191 (Bang). In that case, the Bangalore Tribunal had held
that the agreement was for use of standard facility and standard services; the
payments were for utilisation of customer-based circuits; the payments were not
fees for technical services u/s.9(1)(vii) of the Act and were not subject to
deduction u/s.195 of the Act. The CIT(A) therefore held that the payments were
not subject to TDS u/s.195 of the Act and that the disallowance u/s.40(a)(i) of
the Act was not warranted.
The Department preferred an appal to the Tribunal
against the order of the CIT(A). The Tribunal referred to several clauses of the
reseller agreement and observed that the assessee-company was not paying any
fees for technical services but making payment for the purchase of internet
bandwidth. Even though sophisticated equipment was being used and though the
Internet connectivity was through satellite link, the assessee-company cannot be
said to be availing technical services. Further, the Tribunal also noted that in
the assessee-company’s case for A.Y. 2001-02, the Tribunal had considered
similar issue of disallowance and held in favour of the assessee.
Held
Following the order of
the Bangalore Tribunal in the aforementioned case, the Tribunal upheld the Order
of the CIT(A) and held that :
(i) The payment made
by the assessee-company was not towards rendering of any managerial, technical
or consultancy services, but was merely for use of Internet access facility
and accordingly, the payment was not subject to tax u/s.9(1)(vii) of the Act.
(ii) As such the
assessee-company was not required to deduct tax at source u/s.195 of the Act.
(iii) Since there was
no liability to deduct tax u/s.195 of the Act, the amount could not be
disallowed u/s.40(a)(i) of the Act.
