S. 194J – Internet charges for use of internet connectivity are not covered by section 194J.
S. 194J – Payment for computer software development does not qualify for deduction under section 194J.
FACTS-I:
The assessee, during the year, paid internet charges for use of internet connectivity and deducted tax thereon under section 194C of the Act. The Assessing Officer (AO) held that the payment so made qualifies for deduction of tax under section 194J as “fees for technical services”. He, accordingly, held the assessee to be an assessee-in-default under section 201(1) / 201(1A) of the Act.
Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the action of the AO and held that as per the amendment, the domestic payments are now covered under section 194J and therefore the ratio of the decision relied on by the assessee in the case of Skycell Communications Ltd. (251 ITR 53)(Mad HC) is not applicable in the instant case.
Aggrieved, the assessee preferred an appeal to Tribunal.
HELD:
The Tribunal held that the issue under consideration is squarely covered by various decisions of High Court and Tribunal. It noted that –
(i) the Delhi High Court had an occasion to examine a similar issue in the case of CIT v. Estel Communications (P.) Ltd. (217 CTR 102)(Del) wherein the Court held that mere payment by assessee for an internet bandwidth to a US company did not mean that technical services were rendered by the US company to the assessee and, therefore, provisions of section 9(1)(vii) did not apply so as to warrant any deduction of tax from payment made by the assessee to the US company;
(ii) the Madras High Court in Skycell Communications Ltd and another v. DCIT & Others (2011) 251 ITR has considered the provisions fo section 9(1)(vii);
(iii) Chandigarh Bench of ITAT in the case of HFCL Infotel Ltd. v. ITO (99 TTJ 440)(Chand. ITAT) referred to the decision of Madras High Court in Skycell Communications Ltd.;
(iv) Mumbai Bench of ITAT has in the case of Pacific Internet (India) Pvt. Ltd. v ITO 318 ITR 179 (Mum)(AT) has relied upon the observations rendered in Estel Communications Pvt. Ltd. (supra) and Communications Ltd. (supra) and held that payment for use of internet is not covered by the provisions of section 194J;
(v) Hyderabad Bench of the Tribunal has in the case of Ushodaya Enterprises P. Ltd. v. ACIT (2012) 53 SOT 193 (Hyd.) has held that payment made towards internet charges are similar in nature to bandwidth charges and are similar to the use of telephone lines, payments made for circuit charges to VSNL, bandwidth charges do not come under TDS provision and therefore no deduction is required under section 194J.
Relying on the ratio of the above, the Tribunal held that the assessee cannot be held to be in default for non-deduction of tax on internet charges under section 194J of the Act.
This ground of appeal filed by the assessee was allowed.
FACTS-II:
The AO held the assessee to be in default for not having deducted tax on payment of Rs. 14,96,240 towards purchase of computer software development. The AO was of the view that payment for purchase of software qualifies as a “technical service” and requires deduction of tax under section 194J of the Act. He, accordingly, held the assessee to be an assessee-in-default under section 201(1) and levied interest under section 201(1A).
Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
HELD – II:
Explanation 2 of section 9(1)(vii) defines the words “Fees for technical services” as any consideration (including any lumpsum consideration) for rendering any managerial, technical or consultancy services. It noted that the perusal of the aforesaid definition clarifies that the term FTS would include service of the following three types : Managerial, Technical and Consultancy. Therefore, in order to decide whether the service will fall within FTS or not, it is necessary to determine the scope of these three terms. Considering the scope of these terms as defined by the Mumbai Bench of the Tribunal in the case of TUV Bayren (India) Ltd. dated 6.7.2012 in ITA No. 4994/Mum/2002 it held that the computer software purchased would not fall within the definition of “Fees for technical services” and therefore the provisions of section 194J are not applicable.
The Tribunal held that tax is not required to be deducted at source in respect of payment made for purchase of computer software development.
This ground of appeal was decided in favour of the assessee.
