Section 9(1)(vi) and section 194J of the Act – Payments made to telecom operators for providing toll-free number service were in nature of ‘royalty’ u/s 9(1)(vi) and, consequently, tax was required to be withheld

8. [2020] 116
taxmann.com 250 (Bang.)(Trib.) Vidal Health
Insurance TPA (P) Ltd. vs. JCIT ITA Nos. 736 &
1213 to 1215 (Bang.) of 2018 A.Ys.: 2011-12 to
2014-15 Date of order: 26^th
February, 2020

Section 9(1)(vi)
and section 194J of the Act – Payments made to telecom operators for providing
toll-free number service were in nature of ‘royalty’ u/s 9(1)(vi) and,
consequently, tax was required to be withheld

FACTS

The assessee was
licensed by IRDA for providing TPA services to insurance companies. It engaged
telecom operators (‘telcos’) for allotting toll-free numbers and providing
toll-free telephone services to policy-holders of insurance companies such that
the charges for calls made by policy-holders to the toll-free number were borne
by the assessee and not the policy-holders. The assessee did not deduct tax
from the payments made to the telcos.

According to the
A.O., the payments were in the nature of royalty u/s 9(1)(vi) of the Act, read
with Explanation 6 thereto. Accordingly, he disallowed the payments u/s
40(a)(ia) of the Act.

The CIT(A) held
that since the payments were made by the assessee for voice / data services,
they were in the nature of royalty.

Being aggrieved,
the assessee appealed before the Tribunal. The assessee’s principal argument
was that section 194J deals with deduction of tax from payment of ‘royalty’. As
per Explanation (ba) in section 194J, the meaning of ‘royalty’ should be
construed as per Explanation 2 to section 9(1)(vi) of the Act. Explanation 6 to
section 9(1)(vi) of the Act defines ‘process’. Since section 194J has nowhere
referred to Explanation 6 to section 9(1)(vi) of the Act, it could not be
considered.

HELD

Royalty
characterisation

(i)   A toll-free number involves providing
dedicated private circuit lines to the assessee.

(ii) The consideration paid by the assessee was
towards provision of bandwidth / telecommunication services and further, for
‘the use of’ or ‘right to use equipment’. The assessee was provided assured
bandwidth through which it was guaranteed transmission of data and voice. Such
transmission involved ‘process’, thus satisfying the definition of ‘royalty’ in
Explanation 2 to section 9(1)(vi) of the Act.

Royalty definition
u/s 194J

(a) Explanation 6 to section 9(1)(vi) defines the
expression ‘process’, which is included in the definition of ‘royalty’ in
Explanation 2.

(b) Since Explanation 2 does not define ‘process’,
the definition of ‘process’ in Explanation 6 must be read into Explanation 2 to
analyse whether a particular service comprised ‘process’ and consequently
consideration paid for the same was ‘royalty’.