Income Tax Appellate Tribunal - Hyderabad
Ito, Ward-3(3), Hyd, Hyderabad vs Sms Country Net Works Pvt.Ltd., Hyd, ... on 21 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 1196 and 1197/Hyd/2015
Assessment Years: 2011-12 & 2012-13
Dy. Commissioner of Income- vs. SMS Country Networks Pvt.
tax, Circle - 3(2), Hyderabad. Ltd., Hyderabad.
(Appellant) (Respondent)
Revenue by : Smt. Gitendar Mann
Assessee by : Shri M.S.R. Prasad
Date of hearing 13/02/2018
Date of pronouncement 21/03/2018
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
Both these appeals filed by the revenue are directed against the orders of CIT(A) - 3, Hyderabad relating to AYs 2011-12 and 2012-
13. Since identical issues are involved in both these appeals, they were clubbed and heard together and therefore a common order is passed for the sake of convenience.
2. Briefly the facts of the case as taken from AY 2011-12 are, assessee company engaged in the business of providing of bulk Short Message Services (SMS) to the subscribers located in India and outside India filed its return of income for the AY 2011-12 on 29/09/2011 declaring a net income of Rs. 37,73,454/-, which was processed u/s 143(1) of the Income-tax Act, 1961 (in short 'the Act'). Subsequently, the case was selected for scrutiny under CASS and notices u/s 143(2) and 142(1) were issued and served on the 2 ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
assessee calling for information. In response to the said notices, the AR of the assessee furnished the information as called for.
2.1 The AO observed that during the year, assessee company made the following payments to non-resident companies for use of Mobile network termination & interconnection of service providers located outside India for delivery of SMS to customers outside India:
Sl. Name of the party Amount Amount on Balance No. paid which TDS deducted 1 TYN Tech Ltd. 13,77,407 1,98,117 11,79,290 2 Micro Ocean 15,80,380 2,94,916 12,85,464 Technologies SDN, BHD 3 CLX Networks AB 2,80,522 0 2,80,522 4 Silver Street BV 13,99,205 5,25,425 8,73,780 5 FCC Finance, 25,35,622 0 25,35,622 Kuwait 6 HSL 6,65,525 2,25,145 4,40,380 7 Prepaid Mach 12,23,248 0 12,23,248 8 SMS Country 8,13,174 0 8,13,174 Networks FZE Total 98,75,083 12,43,603 86,31,480 2.2 The AO observed that as per the provisions of section 195, the assessee ought to have deducted tax at source on the payments to the above non-resident parties. As the assessee failed to deduct TDS as required u/s 195, the AO directed the assessee to show cause as to why the expenditure of Rs. 86,31,480/- should not be disallowed u/s 40(a)(ia) of the Act. In response, the assessee filed a reply on 28/01/2014 wherein it was submitted that the Company made certain payments to non-residents located outside India towards SMS termination, interconnect and port charges for delivery of SMS to mobile networks located outside India. These SMS are generated from outside India only and the payments for these are received through paypal payment gateway. The company uses the mobile network termination and interconnectivities of the service providers 3 ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
located outside India for SMS delivery to the customers outside India. The payment made by the company is towards use of these mobile network gateways of the service providers, who are located outside India. Payments made towards interconnect or port charges do not fall within the expression of "Fee for technical services" as held in the case of Skycell Communication Ltd Vs. Deputy Commissioner of Income Tax (2001) 251 ITR 53, Madras High Court. Further, the assessee is also relied on the decision of Hon'ble Delhi High Court in the case of CIT vs Bharati cellular Ltd (2008) 319 ITR 139. As the service providers do not have permanent establishment in India and the payment is not for fee for technical services, no TDS is required u/s 195.
2.3 The AO after considering the submissions of the assessee and perusing the agreement between the assessee and non-resident providers, observed that the payments made by the assessee to non- residents are in the nature of fee for technical services and such payments were the deemed income section 9(1)(vii) of the Income Tax Act, 1961. He further observed that the Explanation to sub- section (2) of section 9, income of a non-resident shall be deemed to accrue or arise in India under clause (vii) of section 9(1), whether or not the non-resident has a residence or place of business or business connection in India or the non-resident had rendered services in India. He, therefore, applying the provisions of section 195 disallowed the entire expenditure of Rs.86,31,480 under section 40(a)(ia) of the Income-tax Act, 1961, on account of the assessee's failure to deduct tax u/s 195 on the payments made to the non-residents.
3. Aggrieved by the order of the AO, the assesse preferred an appeal before the CIT(A) and submitted that the services provided by non-resident companies cannot be considered as 'fee for technical services' as no human intervention is involved in providing such services. Further, it was submitted that the non resident companies are doing business in different foreign countries abroad, therefore, 4 ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
their income is not taxable in India, therefore, provisions of section 195 are not applicable. He relied on the following cases:
1. Skycell Communication Ltd, 251 ITR 53 (Mad) (HC)
2. Bharati Cellular Ltd., 319 ITR 139 (Del) (HC)
3. M/s Velti India Pvt. Ltd., ITA No. 1030/Mds/2013 (Mad) (ITA).
4. The CIT(A) relying on the decision of the ITAT, Chennai Bench in the case of M/s Velti India Pvt. Ltd. (supra) and the decision of the Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd., Vs. CIT, [2010] 327 ITR 456, held that the amounts paid by the assessee to non-resident companies for the purpose of transmitting bulk SMS abroad cannot be considered as technical services, therefore, not liable to TDS u/s 195 and accordingly deleted the disallowance made u/s 40(a)(ia) by the AO.
5. Aggrieved by the order of the CIT(A), the revenue is in appeal before us raising the following grounds of appeal:
1. The learned CIT (A) erred both in law and on facts of the case.
2. The Learned CIT (A) erred in deleting the addition made of Rs. 86,31,480/- by the Assessing Officer u/s 40(a)(ia) of the Act, on the ground that there is no human intervention and the amounts paid to non-resident companies do not fall in the ambit of Section 195 of the Act, despite of the fact that the Assessing Officer had made such disallowance basing on the agreements entered into with the service provided as per which the services provided involve human intervention.
3. Any other ground(s) that may be urged at the time of hearing."
6. Considered the rival submissions and perused the material on record. The dispute is only with reference to the payments made to non-resident companies. The assessee made payments to the tune of Rs. 98,75,083/- to non-resident companies, out of this TDS was deducted on Rs. 12,43,603/-. No TDS was deducted on payments made of Rs. 86,31,480/- in accordance with the advice given by their consultants. The main contention of the revenue is that the services 5 ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
provided by the non-resident involve human intervention and falls within the ambit of section 9(i)(vii) of the Act. The basis for such contention is the agreement entered by the assessee with Hay Systems Ltd. (HSL) and its own subsidiary in "UAE". In these agreements, the obligations of such non-residents are:
"3. Obligation of HSL:
HSL shall 3.1 provide the services with reasonable skill and care and using suitably skilled and appropriately experienced personnel.
3.2 use all reasonable endeavours to provide the services in accordance with any timescales as may be agreed between the parties."
6.1 As per the above agreement, the non-residents in the services providers are to provide services with reasonable skill and care by using suitably skilled and appropriately experienced personnel. Also it should be provided within timescales agreed between parties. This requirement of skilled persons is to provide the services or to have minimum qualification to get hired to monitor the services. What is relevant is, whether any human intervention is required in transmitting the SMS services, which is the main activity between the parties. As per the above agreement, the services are defined in Schedule - Part 3, as per which the "SMS Carrier Services", are:
"SMS Messaging Services
1. SMS Carrier Services 1.1 HSL contracts to provide mobile messaging service to the customer.
1.2 Access is provided to the customer to the SMS gateway operated by HSL for communicating messages between the computer system of the customer or systems acting on behalf of the customer and mobile devices using the short message service (SMS) 6 ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
1.3 Access to HSL's SMS gateway will be using the internet.
1.4 The method by which the customers systems will communicate with HSL's SMS gateway is the SMPP (short message peer to peer) protocol as defined by the SMS forum and supported as declared in SMS carrier SMPP abbreviated PACS document published at http:/www.sms carrier.com.
1.5 Support for SMS specific features such as delivery receipts. UDHI and 8-bit data are provided for all networks in all countries listed at http:/www.smscarrier.com./cov-pricing html."
6.2 From the above, it is clear that, it is contract to provide mobile messaging services, access provided to the SMS gateway operated by HSL for communicating messages between the computer system of the customer and mobile device, access to SMS gateway operated by "HSL" by using internet and communication with the held of SMPP. It shows that the services offered by the HSL are purely system to system. In the delivery of SMS, only the systems are utilized and nowhere in the process of agreement, it is highlighted the involvement of any personnel. It shows that there is no requirement of human intervention in transmitting the SMS except employment of quality personnel. Therefore, the ratio of decision of Hon'ble Delhi High Court in the case of CIT Vs. Bharati Cellular Ltd., [2009] 319 ITR 139 (Delhi) is relevant, which has clearly explained the transmission through systems are outside the purview of 'technical services', where there is no intervention of humans. Therefore, we are in agreement with the findings of ld. CIT(A) and accordingly, uphold the order of CIT(A) and dismiss the ground raised by revenue.
6.3 As the issue in AY 2012-13 is materially identical to that of AY 2011-12, following the conclusions drawn therein, we dismiss the appeal in AY 2012-13 also.
7ITA No. 1196 & 1197/Hyd/2015 SMS Country Networks Pvt. Ltd..
7. In the result, both the appeals of revenue are dismissed.
Pronounced in the open Court on 21 st March, 2018.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 21 st March, 2018
kv
Copy to:-
1) DCIT, Circle - 3(2), 7 th Floor, "B" Block, IT Towers, AC Guards, Hyderabad.
2) M/s SMS Country Networks Pvt. Ltd., Plot No. 2 & 3, 2 nd Floor, Ektha Towers, White Fields, Opp. Botanical Gardens, Kondapur, Hyderabad - 500 084
3) CIT(A) - 3, Hyd.
4) Pr. CIT - 3, Hyd.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File