HIGHLIGHTS: The Toll Free Telephone Service includes the Private Dedicated lines to Assessee. The service includes assured Bandwidth, through which, the assessee was guaranteed transmission of data and voice, of customers. ITAT observed that there is a ‘process’ involved for exclusive communication link of customers with assessee. It is pertinent to note that, definition of term “royalty” in Explanation 2 to section 9(1)(vi) includes the term ‘process’. Ground No. 1 of ITA Nos. 1213 to 1215/Bang/2018 & ITA No. 736/Bang/2018 1. Disallowance of expenses incurred towards toll free telephone charges u/s. 40(a)(ia) of the Income-tax Act,1961 (‘the Act’) 1.1. The learned Assistant Commissioner of Income-tax Circle 7(1)(2), Bangalore[‘ACIT’ or ‘AO’]erred in disallowing expenditure of Rs.58,80,650 incurred towards toll-free telephone charges under section 40(a)(ia) of the Act for non-deduction of taxes under section 194J of the Act on the basis that the payments would qualify as ‘royalty’ under the Act. The leaned Commissioner of Income-tax (Appeals)-7 Bangalore [‘CIT(A)”] erred in upholding the finding of the learned AO. 1.2.Without Prejudice to the above, the learned AO and the learned CIT (A) erred in not taking cognizance of the Appellant’s contention that for the purposes of disallowance under section 40 (a)(ia) of the Act, the term royalty would be restricted to the definition as provided under Explanation 2 to section 9(1)(iv) of the Act and would, therefore, not include payments for toll free telephone charges provided under Explanation 6 to section 9(1)(iv) of the Act. 1.3. The learned CIT(A) erred in not directing the learned AO to verify and allow relief based on the certificates in from 26A that the Appellant proposes to file with the learned AO, in line with second proviso to section 40(a)(ia), read with first proviso to section 201(1) of the Act. Other Ground not explained and are found in detail as per attached ITAT Order. OBSERVATION & RULING OF THE ITAT, BENGALORE We have perused submissions advanced by both sides in light of records placed us. Ld.CIT(A) dismissed the issue raised by assessee by relying on decision of Hon’ble Madras High Court in case of Verizon (supra). In the present facts of case, payments made are towards toll-free telephone charges paid for toll free telephone number provided by telecom operators, whereby charges for calls made by consumers to the toll-free number is borne by assessee. These are dedicated private circuit lines available to assessee. In other words, a toll-free telephone number or free phone number is a telephone number billed on assessee for all arriving calls, instead of levying charges on telephone caller. For the calling party, call to such toll-free number is free of charge. It is for this exclusive telephone line that payment is made by assessee. Revenue is of the opinion that payment made by assessee for such services amounts to Royalty u/s.9(1) (vi) of the Act, and that assessee is liable to deduct TDS u/s194 J of the Act. There are various judgements relied on by both sides in support of their contentions. 5.1. Section 194J of the Act, enjoins upon any person not being an individual or a HUF to deduct tax at source on certain payments, one of them being royalty, to a resident. Explanation (ba) to section 194J(1) defines ‘royalty’, by referring to the meaning given in Explanation 2 to section 9(1)(vi) of the Act. For sake of convenience, Explanation 2 of section 9(1) (vi) is extracted hereunder : ‘Explanation 2. – For the purposes of this clause, ‘royalty’ means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘Capital gains’) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).’ As per Para 5.2 of the Order, which is reproduced as below: ‘Royalty’, as defined herein above, has very wide import. It brings within its ambit payment made for any kind of services received. As can be seen from the above, ‘royalty’ as per clause (vi) of Section 9 would take within its ambit, rendering of any services in connection with activities referred in sub-clauses (i) to (v). In our view consideration paid by assessee is towards provision of bandwidth/telecommunications services for the “use of’, or ‘right to use equipment”. As we analyse services received by assessee in present facts of case, assessee is assured, bandwidth through which, assessee was guaranteed transmission of data and voice, of customers. We observe that there is a ‘process’ involved for exclusive communication link of customers with assessee. It is pertinent to note that, definition of term “royalty” in Explanation 2 to section 9(1)(vi) includes the term ‘process’. Ld AR substantially argued against retrospective application of Explanation 6 applied by authorities below. In our view, this explanation merely defines the expression, ‘process’ , which has to be read into Explanation 2, while examining definition of the term ‘royalty’ into facts of a case. For the sake of convenience the same is reproduced herein below: “Explanation 6- for the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellites (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;” As we analyse above Explanation 6, it is a deeming definition for the term ‘process’ to have included various services mentioned therein. As Explanation 2 does not define the term, ‘process’, Explanation 6 will have to be considered while analyzing, a particular service to be ‘process’ for purposes of section 9 (vi) of the Act. As the term ‘process’ always existed in Explanation 2, legislature introduced Explanation 6 with retrospective effect. We therefore reject argument advanced by Ld.AR that Explanation 6 cannot be applied to definition of ‘Royalty’ Facts in decision relied upon by Ld.AR rendered by Hon’ble Bombay High Court in case of CIT vs M/s. NGC Networks India Pvt. Ltd., (supra) is different from facts in present case and therefore will be of any help to assessee. On the basis of above discussions, we are of the opinion that, payments made by assessee is royalty, in terms of Section 9(1)(vi) of the Act, and is liable to deduct TDS under section 194J of the Act. We therefore are in agreement with the view taken by Ld.CIT (A). Admittedly, assessee has not deducted TDS on payments made towards toll-free charges, and therefore, disallowance under section 40 (a) (ia) is warranted. However, we set aside this issue to Ld.AO for verification as to whether the payee paid taxes on such payments received from assessee during relevant period. Reliance is placed on decision of Hon’ble Supreme Court in case of Hindustan Coca-Cola Beverages Pvt. Ltd vs CIT reported in (2007) 163 taxman 355, wherein it has been observed that, where tax due has been paid by the deducted, demand under section 201 (1) of the Act cannot be enforced on assessee. In the event, assessee is able to establish that, due taxe has been paid by Payee on such payments received, the disallowance made under section 40 (a) (ia) shall be deleted. Needless to say that assessee shall be granted proper opportunity of being heard as per law. With the above directions we set aside this issue back to Ld. AO. Accordingly Ground 1 stands dismissed For Detailed ITAT Order, Please click here: