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June 2014

[2014] 43 taxmann.com 425 (Chennai – Trib.) DCIT vs. Velti India (P.) Ltd A.Y: 2009-10, Dated: 27-02-2014

By Geeta Jani, Dhishat B. Mehta Chartered Accountants
Reading Time 2 mins
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Article 12, India-South Africa DTAA; section 9, 40(a)(i), the Act – payments made to nonresident for transmission of bulk SMS were not FTS and hence withholding tax obligation did not arise.

Facts:
The taxpayer was an Indian company. The taxpayer availed services of a telecom carrier in South Africa (“SACo”) to transmit bulk SMS. For this service, the taxpayer made certain payments to SACo. The taxpayer did not withhold tax from such payments.

In the course of assessment of income, the AO concluded that the payments made by the taxpayer to SACo were FTS and accordingly, the taxpayer should have withheld tax from the said payments. Since the taxpayer had not withheld tax from the said payments, invoking provisions of section 40(a)(i) of the Act, the AO disallowed the payments.

Held:
• As per Article 12 of India-South Africa DTAA, FTS “means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature”.

• The service provided by SACo was only transmission of bulk SMS, which was mere transmission of data and did not require any technical knowledge or skill. Delhi High Court has held1 that such services do not involve human intervention and therefore the payments cannot be regarded as FTS. Also, Madras High Court has held2 that collection of fees for usage of standard facility does not result in payment for providing technical services.

• The services were rendered outside India.

• Section 195 should be read along with sections 4, 5 and 9 as well as the tax treaties and unless the income is chargeable to tax in India, withholding tax obligation does not arise.

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