ITAT quashes order confirming disallowance of leased line charges due on non-deduction of TDS

ITAT quashes order confirming disallowance of leased line charges due on non-deduction of TDS

The Income Tax Appellate Tribunal (ITAT), Pune Bench quashed the order of CIT(A) and held that allowing deduction of Rs.2.41 crore in entirety, there can be no question of making any separate disallowance in respect of 10AA unit

Brief facts of the case

The facts of the case are, M/s. Barclays Technology Centre India Pvt. Ltd. (assessee) is an Indian Private limited company engaged in providing Software Solution services to Barclays group worldwide. It has one undertaking approved as a 100% Export Oriented unit eligible for deduction under Section 10B of the Income-tax Act, 1961 (IT Act), another unit within the area of Special Economic Zone (SEZ) entitled to deduction under Section 10AA of the IT Act and still another unit in Domestic Tariff Area (DTA) in Mumbai. Section 10AA of the IT Act provides special provisions in respect of newly established Units in Special Economic Zones.

During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee paid a sum of Rs.2,41,82,749 as leased line charges to various vendors in India, which were claimed as deduction.

The assessee was called upon by the AO to explain as to why no deduction of tax at source was made in terms of Section 194J of the IT Act. Section 194J of the IT Act deals with fees applicable on professional and technical services.

The payment according to the AO was in the nature of fees for technical services that are required to be deducted at source under Section 194J of the IT Act. Having not done so, the AO invoked Section 40(a)(ia) of the Act.

Observations of the AO

The AO noticed that out of the sum of Rs.2.41 crore, an amount of Rs.55,46,411/- was incurred against Special Economic Zone (SEZ) unit. The AO opined that the enhanced claim of deduction under Section 10AA due to disallowance under Section 40(a)(ia) on this count will not be available to the assessee.

Decision of the CIT(A)

The matter was listed before the Commissioner of Income Tax (Appeals) [CIT(A)] wherein CIT(A). It approved the stand of the AO, by holding the amount paid by the assessee was in the nature of 'Royalty' under the terms of Explanation 6 to Section 9(1)(vi) inserted by the Finance Act, 2012. Hence, the assessee was obliged to deduct tax at source on payment of Rs.2.41 crore.

CIT(A) further held that the disallowance of the leased line charges makes the assessee eligible for deduction under Section10AA of the IT Act at the enhanced income.

The assessee was aggrieved by the sustenance of disallowance under Section 40(a)(ia) to the tune of Rs.2.41 crore and the Revenue has challenged the succor provided by the CIT(A) in allowing deduction under Section 10AA at the enhanced profit because of the disallowance of Rs.55.46 lakh pertaining to the eligible unit.

Two cross-appeals were filed before the ITAT, one by the assessee and the other by the Revenue Department emanate from the order dated 29 December 2016 passed by the CIT(A) in relation to the assessment year 2012-13.

Issues before the ITAT

1. Whether the assessee was liable to deduct tax at source on the amount of leased line charges paid by it to various vendors in India to warrant disallowance under Section 40(a)(ia) of the IT Act?

2. Whether the assessee could have legally deducted tax at source from the payments made during the F.Y. 2011-12 corresponding to the A.Y. 2012-13 under consideration?

Observations of the ITAT

The ITAT discussed the expression 'income by way of royalty' in depth and observed that a leased line is a dedicated communication channel that easily interconnects two or more sites ensuring uninterrupted data flow from one point to another. It is a dedicated, fixed-bandwidth data connection, which allows users to have a reliable, high-quality internet connection.

The ITAT further observed that the assessee paid for securing a dedicated line for flow of its data, which is nothing but leased line charges. Explanations 5 and 6 read with Explanation 2 to Section 9(1)(vi), it becomes clear that the leased line charges paid for transmission by any technology, get covered within the definition of "Royalty" by the Finance Act 2012.

Since a resident paid leased line charges to another resident, the matter ends by examining the ambit of the term "Royalty" under the Finance Act. It further stated that the payment of leased line charges amounting to Rs.2.41 crore amounted to "Royalty" and the same is covered under Section 194J.

It stated that there is no need to examine various Double Tax Avoidance Agreement (DTAAs) which have been looked into by the Tribunal in certain decisions for holding that leased line charges are not 'royalty' in the light of the definition of the term "Royalty" as used in the respective DTAAs.

The ITAT while quashing the charges against the assessee stated that the assessee could not have activated its sixth sense to ascertain that an obligation to deduct tax at source was in offing. While discussing the scope of 'royalty' it stated that it came to be expanded after the close of the financial year when the assessee had already paid lease line charges.

Liability to deduction of tax at source

According to the ITAT, liability to deduct tax at source can be fastened only under the law prevailing at the time of payment. If no liability exists at the time of payment, any subsequent retrospective amendment cannot be enforced against the payer.

Once there is no liability to deduct tax at source at the material time, the fortiori is that there can be no question of disallowance under Section 40(a)(ia) of the IT Act.

When the payment of leased line charges was made, no existing provision at that time made the assessee clearly liable to deduct tax at source. Since the leased line charges got the final dressing up as 'Royalty' under Section 9(1)(vi) of the Finance Act after the close of the relevant

Decision of the ITAT

The Coram of S.S. Visvanethra Ravi and R.S. Syal allowed the assessee's appeal and dismissed the appeal filed by the revenue department. It held that although the amount became chargeable to tax as royalty in the hands of the recipient under the IT Act, it would not create an obligation to deduct tax at the source.

It held that the same could not have triggered deduction of tax at source to warrant any disallowance under Section 40(a)(ia) of the IT Act.