By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi, Chartered Accountants
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Section
194J read with Section 194C of the Income-tax Act, 1961- An assessee is
required to deduct tax under section 194J if it acquires or uses technical
knowhow which is provided by a human element. Mere use of technology by
contractors who provide services to the assessee would not make those services
technical services and hence when assessee makes payments to such contractors,
tax is required to be deducted under section 194C and not under section 194J.
FACTS:
The assessee Company was
involved in providing banking services through its network of agents in
extremely rural areas by use of a device called “Point of Transaction Machine
(POT)”.
The transactions of the
beneficiary/customers were settled at the end of the day by connecting the POT
to the Bank Server and the transactions of the beneficiary got reflected in the
beneficiary’s bank account.
In the relevant
assessment year, the assessee company had deducted tax u/s 194C on the payments
made to contractor towards the major expenses incurred under the heads – enrollment
charges, AMC charges, POT usage charges and rent for POT machines.
The AO observed that the
assessee was providing services for opening bank accounts to different banking
institutions in rural areas and that for opening bank accounts it was taking
help of other service-providers who would mobilise technical manpower for
opening the bank accounts. The service providers would prepare bio-metric and
demographic particulars of the customers and put the same in bank network for
the assessee.
The AO held that the
services of capturing photos and finger-prints by web camera and scanner
required highly technical skill and specified software and that the procedure
could not be performed by non-technical person. Hence, for such services,
payments made by the assessee under the heads enrollment expenses and AMC
charges would attract tax deduction under section 194J of the Act. Hence the AO
held that the assessee was in default under section 201(1) for the shortfall of
tax deduction and under section 201A for interest on the shorfall.
Aggrieved by the order of
the AO the assessee preferred an appeal before the First Appellate Authority
(FAA). The assessee argued that it had hired services of service provider as a
contractor and that mere use of technology and/or technical equipments by
service providers while doing the said composite work for assessee would not
make it as a technical service and hence the tax was rightly deducted u/s. 194C
of the Act.
The FAA held that
provisions of 194C were applicable as there was no acquisition / use of
technical know-how by the assessee.
On revenue’s appeal –
HELD:
In case of CIT v.
Delhi Transco Ltd. [2015] 380 ITR 398 the Hon’ble Delhi High Court has defined
the word technical services while dealing with the section 194 J of the Act, in
the following manner-
Section 194J of the Income-tax Act, 1961, provides
for deduction of tax at source from fees for technical services. Technical
services consist of services of technical nature when special skills or
knowledge relating to technical field are required for their provision,
managerial services are rendered for performing management functions and
consultancy services relate to provision of advice by someone having special
qualification that allow him to do so. What constitutes technical services
cannot be understood in a rigid formulaic manner. It will vary from industry to
industry. There will have to be a specific line of enquiry for determining what
in a particular industry would constitute rendering of a technical service.
In the case under
consideration, the FAA has rightly held that the provisions of section 194J
would not be applicable based on the following observation –
The services provided to the assessee were manual in
nature and no specific skills were required to provide the said services. The
services rendered by the parties to the assessee were neither in the nature of
fee for professional services, nor in the nature of managerial, technical or
consultancy services. Mere use of technology would not make it technical
services. For provisions of section 194J to be applicable, it is necessary that
there must either be acquisition or use of technical knowhow which is provided
by a human element. There was no acquisition of technical expertise/knowhow by
the assessee and the service providers were contractors executing contracts for
projects undertaken and hence the provisions of section 194C were applicable.
In the case under
consideration there is a use of technology, but, it does not mean that it is
not a contract. There is no legal or factual infirmity in the order of the FAA
and the assessee has rightly deducted tax as per the provisions of section 194C
of the Act.
Note – Relying on
the decision in case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 it was
also held that, the expression “fees for technical services” in
section 194J of the Income-tax Act, 1961 has the same meaning as given to the
expression in Explanation 2 to section 9(1)(vii) of the Act. In the said explanation
the expression “fees for technical services” means any consideration
for rendering of any “managerial, technical or consultancy services”.
Applying the rule of noscitur a sociis, the word “technical” would
take colour from the words “managerial” and “consultancy”,
between which it is sandwiched. Since both the words “managerial” and
“consultancy” involve a human element, the word “technical”
would also have to be construed as involving a human element.
