Madras High Court
M/S Cognizant Technology vs The Income Tax Officer (Tds) / on 28 April, 2026
Author: G.Jayachandran
Bench: G. Jayachandran
Tax Case (Appeals).Nos.651 to 653 of 2016
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On: 28.04.2026 Delivered On:30.04.2026
CORAM
THE HONOURABLE DR JUSTICE G. JAYACHANDRAN
AND
THE HONOURABLE MR. JUSTICE SHAMIM AHMED
Tax Case (Appeals) Nos.651 to 653 of 2016
M/s.Cognizant Technology Solutions India Private Limited,
No.38, Whites Road,
II Floor Chennai-600 014,
Now at 165/110, Menon Eternity,
6th Floor, St. Mary’s Road,
Alwarpet,
Chennai-600 018. … Appellant
in all appeals
vs.
The Income-Tax Officer (TDS) /
Deputy Commissioner of Income-tax,
Large Tax Payer Unit,
Chennai 600 101. … Respondent
in all appeals
Common Prayer: Tax Case Appeals filed under Section 260A of the Income
Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, “C”
Bench, Chennai dated 09th June, 2014 in I.T.A.No.1535/Mds/2009,
I.T.A.No.1536/Mds/2009 & I.T.A.No.460/Mds/2010 respectively.
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Page Nos.1/18
https://www.mhc.tn.gov.in/judis
Tax Case (Appeals).Nos.651 to 653 of 2016
For Appellant : Mr.Vikram Vijayaraghavan,
in all appeals for M/s.Subbaraya Aiyar.
For Respondent : Mr.D.Prabhu Mukunth Arun Kumar,
in all appeals Senior Standing Counsel
COMMON JUDGMENT
The order impugned is the common order dated 09th June 2014, passed by the Income Tax Appellate Tribunal, Chennai, in a batch of six statutory appeals before the Commissioner of Income Tax (Appeals).
2. The appeals under consideration are in respect of the assessment years 2002-2003 & 2003-2004. The dispute relates to the disallowance of expenditure claimed in respect of payments made to a non-resident company as internet charges, which were subjected to tax under Section 40(a)(i) of the Act, along with the levy of tax and interest under Section 201 of Income Tax Act.
(i) T.C.A.No.651 of 2016 is filed against the order, dated 09.06.2014, in I.T.A.No.1535/Mds/2009, for the assessment year 2002-03. Subject-matter of this Appeal relates to an order of assessment, under Sections 201 and 201 (1A) of the Income Tax, 1961.
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(ii) T.C.A.No.652 of 2016 is filed against the order, dated 09.06.2014, in I.T.A.No.1536/Mds/2009, for the assessment year 2003-2004. Subject-matter of this appeal relates to an order of assessment under Sections 201 and 201(1A) of the Income Tax Act, 1961.
(iii) T.C.A.No.653 of 2016 is filed against the order, dated 09.06.2014, in I.T.A.No.460/Mds/2010, for the assessment year 2002-2003. Subject-matter of this appeal relates to an order of assessment under Section 201 of the Income Tax Act, 1961.
3. Brief background of the case:
The appellant engaged in the business of development and export of computer software. For the assessment years 2002-2003 and 2003-2004, it filed its returns of income declaring total income of Rs.13,50,59,260/- and Rs.10,95,03,660/-, respectively. During these years, the remittance of Rs.5,42,18,347/- (for Assessment Year 2002-2003) and Rs.4,23,31,103/- (for Assessment Year 2003-2004) to M/s.Sprint Communications, USA, towards various services in the nature of international telecom connectivity charges, ______________ Page Nos.3/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 business data exchange, video conferencing and other telecommunication facilities. The assessee Company did not deduct tax at source (TDS). The Income Tax Officer, considered the said remittance to the non-resident Company for the ‘International Private Leased Circuit’ (IPLC) would constitute ‘Royalty’- for the use of equipment. Hence, TDS ought to have been deducted.
Since the assessee did not deduct TDS, proceedings under Sections 201 and 201(A) of the Income Act was initiated for the Assessment Year 2002-2003 and Assessment Year 2003-2004.
4. The Income Tax Officer held that the IPLC is an end-to-end seamless service provided by the non-resident Company through its own source. The assessee is paying charges for all network equipment. The circuit provides the services and the payments are made for the use of bandwidth in than and circuit which constitutes use of, or right to use, equipment. As a result, the ITO vide his order dated 20.02.2006, treated the assessee as a defaulter for non- deduction of TDS and ordered recovery of Rs.54,22,154/- (for the Assessment Year 2002-2003) and Rs.33,59,762/- (for the Assessment Year 2003-04) under Section 201(1) & 201(1A), together with interest of Rs.31,44,931/- (for Assessment Year 2002-2003) and Rs.15,84,772/- (for the Assessment Year ______________ Page Nos.4/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 2003-04) under Section 202 and 201(A) of the Income Tax Act.
5. Assailing the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The contention of the assessee was accepted by Commissioner of Income Tax (Appeals) holding that the payment made to M/s.Sprint Communications is not ‘Royalty’ and is not chargeable to tax under the Act. Furthermore, in the absence of Permanent Establishment (PE) for the services rendered by M/s.Sprint Communications, there was no liability to pay tax in India and consequently, there is no obligation on the part of the assessee to deduct tax at source under Section 195 of the Act.
6. Meanwhile, the Commissioner of Income Tax initiated proceedings under Section 263 of the Act for the Assessment Year 2002-2003 by issuing a notice under Section 263 of the Act proposing the revision of the assessment order dated 17.03.2005, to re-compute the deduction under Section 10B and to disallow the remittance of Rs.5,42,18,347/- for hiring ‘IPLC’ under Section 40(a)(i) of the Act, for non-deduction of TDS. This action was also resisted by the assessee, but same was negatived and passed disallowing the deduction claimed. This order also challenged by the assessee before the Commissioner of ______________ Page Nos.5/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 Income Tax (Appeals) and the appeal was also allowed by Commissioner of Income Tax (Appeals) in favour of the assessee.
7. As against the orders of the Appellate Authority, the Revenue filed the following appeals before the Tribunal:-
1) I.T.A.No.1535/Mds/2009, (Assessment Year 2002-2003) – in respect of TDS proceedings under Section 201.
2) I.T.A.No.1536/Mds/2009, (Assessment Year 2003-2004) – in respect of proceedings under Section 201.
3) I.T.A.No.460/Mds/2016 (Assessment Year 2002-2003) – in respect of the order under Section 40(a)(1).
8. In the above three appeals, as well as in few more appeals and the cross-objection filed by the assessee for the subsequent assessment years, the ITAT passed a common order dated 09.06.2014, reversing the order of the Commissioner of Income Tax (Appeals).
9. Assailing the order of the Income Tax Appellate Tribunal, the assessee has filed these appeals raising common questions of law for ______________ Page Nos.6/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 consideration. This Court admitted the appeals and framed the following substantial questions of law for determination:
1. Whether on the facts and circumstances of the case the Tribunal was right in law in holding that the payment to the non-resident company towards International Private Leased Circuit (IPLC) for providing bandwidth services constitutes "Royalty" under Explanations 5 and 6 to Section 9 (1) (vi) of the Act, introduced by the Finance Act, 2012 w.e.f. 01.06.1976 and hence, taxable under the Act?
2. Whether on the facts and circumstances of the case the Tribunal was right in law in holding that International Private Leased Circuit (IPLC) is equipment and the consideration paid for provision of bandwidth services is for the 'use of, or 'right to use' the equipment is 'royalty'?
3. Whether on the facts and circumstances of the case the Tribunal ought to have held that the payment to Sprint does not constitute Royalty under Article 12 (3) of the DTAA between India and USA and hence not taxable in India as per the provisions of the said DTAA?
4. Whether on the facts and circumstances of the case the Hon 'ble Tribunal erred in not appreciating ______________ Page Nos.7/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 that in the absence of permanent establishment as contemplated under Article 5 of the DTAA between India and USA, the business profits of Sprint are not chargeable to tax in India under Article 7?
5. Whether on the facts and circumstances of the case the Tribunal was right in law in holding that failure on the part of the assessee to deduct tax at source under Section 195 of the Act in respect of bandwitch charges would attract the provisions of Sections 201 (1) and 201 (1A) of the Act?
6. Whether the Tribunal erred in relying on the decision of the Hon 'ble Jurisdictional High Court in the case of M/s. Verizon Communications Singapore PTE Ltd v. ITO, 361 ITR 575, which was rendered in the context of tax liability of non-resident and not on the withholding tax provisions?
7. Whether on the facts and circumstances of the case the Tribunal was right in law in confirming the disallowance under Section 40 (a) (i) of the Act, on the basis of retrospective amendments without appreciating that the Assessee at the time of remittance could not have anticipated such subsequent amendments and hence, the impossibility of performance at the time of making such payments?
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8. Whether on the facts and circumstances of the case the Tribunal was right in not considering the applicability of Article 26 (3) of the India-USA DTAA which provides for non-discrimination in allowance of expenditure in the nature of interest, royalties and other disbursement, whereby for the purpose of determining the taxable profits, these amounts will be deductible under the same conditions had they been paid to the residents?
9. Whether on the facts and circumstances of the case the Tribunal ought to have held that provisions of Section 40 (a) (i) of the Act are applicable only on amounts outstanding and payable to the Non-resident as at the close of the previous year and not to the amounts which have already been paid and are not payable as at the close of the previous year?”
10. At the outset, the Learned Counsel for the appellant/assessee submitted that the issues as couched centres on the question about the remittance made to the non-resident company for providing telecommunication services. The issue is whether such remittance will fall within the meaning of ‘Royalty’ for the right to use equipment, or it is payment for the service rendered outside India. In alternate, without prejudice to the above contention, even if such remittance is deemed to be royalty, whether in the light of Section ______________ Page Nos.9/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 90 of Income Tax Act and Non-Discrimination clause provided under the statute as well as DTAA, there can be any levy of tax or levy of interest for not deducting tax at source.
11. Further, the Learned Counsel proceeded with the submission that, the order of the Tribunal is liable to be set aside, in view of the fact that the judgment of M/s.Verizon Communications Singapore PTE Ltd v. ITO (International Taxation) reported in 261 ITR 575 (Mad) relied by the Tribunal has been overruled by the Hon’ble Supreme Court subsequently in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT reported in (2021) 432 ITR 471 (SC). This decision has been followed by the Division Bench of this Court in T.C.A.No.277 to 280 of 2016, in the assessee’s own case.
12. The appellant, being aggrieved by the disallowance of expenditure claimed in respect of remittance to M/s.Sprint Communications, USA, for hiring International Private Leased Circuit (IPLC), contended that the Revenue had erroneously treated the said remittance as ‘Royalty’ under Explanation (vi) to Section 9 of the Act. The payment made for the services rendered by the non- resident Company is a revenue expenditure and the provisions for deduction of ______________ Page Nos.10/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 tax at source were not applicable to the remittance made to a non-resident company.
13. The appellant strongly rely upon the judgment of the Hon’ble Supreme Court rendered in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT reported in (2021) 432 ITR 471 (SC) which has been followed by Division Bench judgment of this Court in Cognizant Technology Solutions India Private Limited v. Commissioner of Income Tax, (T.C.A.Nos.277 to 280 of 2016, dated 25.11.2025).
14. The payment in respect of facilities that had been extended by M/s.Sprint Communications, USA, in the absence of a Permanent Establishment (‘PE’) of M/s.Sprint Communications, USA in India, the amount was not taxable in India. Accordingly, no tax had been deducted at source (TDS) under Section 195. The said expenditure does not fall within the definition of ‘Royalty’, as contended by the Department.
15. The Division Bench of this Court, while considering an identical issue, had read in Explanation 6 to Section 9(1) of the Act and Section 40(a)(i) ______________ Page Nos.11/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 and held that the expenditure in respect of payment to non-resident company for providing internet services to the customers will not fall within the ambit of the term ‘Royalty’ as defined under Section 9 of the Act.
16. The Learned Counsel representing the Department contended that the Explanation to Section (2) to Section 9(1)(vi) of the Act, simpliciter, would mean that consideration paid to a non-resident company has to be considered as ‘royalty’. The removal of any doubts, Explanations 4, 5 & 6 was inserted as a clarification. Therefore, the remittance to M/s.Sprint Communications has to be considered as royalty and not as expenditure simpliciter.
17. From the Division Bench in the assessee’s case referred above, this Court understand that, following the judgment of the Hon’ble Supreme Court rendered in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT reported in (2021) 432 ITR 471 (SC), which overruled its earlier view in M/s.Verizon Communications Singapore PTE Ltd v. ITO (International Taxation) reported in 261 ITR 575 (Mad), the Madras High Court has held that the explanation brought into the Act by virtue of the Finance Act, 2012, cannot have retrospective application.
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18. The following observations of the Hon’ble Supreme Court were relied and extracted by the Division Bench in its order.
“77. It is equally difficult to accept the learned Additional Solicitor General's submission that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is clarificatory of the position as it always stood, since 1-6- 1976, for which he strongly relied upon CBDT Circular No. 152 dated 27-11-1974. Quite obviously, such a circular cannot apply as it would then be explanatory of a position that existed even before Section 9(1)(vi) was actually inserted in the Income Tax Act vide the Finance Act, 1976. Secondly, insofar as Section 9(1)(vi) of the Income Tax Act relates to computer software, Explanation 3 thereof, refers to “computer software” for the first time with effect from 1-4-1991, when it was introduced, which was then amended vide the Finance Act, 2000. Quite clearly, Explanation 4 cannot apply to any right for the use of or the right to use computer software even before the term “computer software” was inserted in the statute. Likewise, even qua Section 2(o) of the Copyright Act, the term “computer software” was introduced for the first time in the definition of a literary work, and defined under Section 2(ffc) only in 1994 (vide Act 38 of 1994).
78. Furthermore, it is equally ludicrous for the aforesaid amendment which also inserted Explanation 6 to Section 9(1)(vi) of the Income Tax Act, to apply with effect ______________ Page Nos.13/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 from 1-6-1976, when technology relating to transmission by a satellite, optic fibre or other similar technology, was only regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is not clarificatory of the position as of 1-6-1976, but in fact, expands that position to include what is stated therein, vide the Finance Act, 2012.”
19. While concluding, the Division Bench of this Court, in the assessee’s own case, answered the issue in favour of the assessee with the following observations:
“12.8.1. The view taken in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra) is that even if the assessee does not have an effective control over the equipment, the use of process will render payment liable to be treated as royalty was based on application of Explanations 4, 5 and 6 added by way of Finance Act, 2012 and we see from a reading of the said judgment, that the assessee's case based on decision in the case Asia Satellite Telecommunications Private Limited v. DIT (2011) 332 ITR 340 (Delhi) and various rulings of the Authority on Advance Rulings was rejected by holding that such decisions are of no assistance in view of the amendment which was introduced by Finance Act, 2012 by ______________ Page Nos.14/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 insertion of Explanations 5 and 6.
12.8.2. In Verizon Communications Singapore PTE Ltd v. ITO (supra), the decision in the case of Poompuhar Shipping Corporation Limited v. ITO (2013) 38 taxmann.com 150 (Madras), was relied upon, wherein for the purposes of determining whether the payments made constituted royalty, recourse was had to the meaning assigned to it by taking into consideration newly inserted Explanations 4 and 5 under the Finance Act, 2012.
12.8.3. It was precisely on application of the newly inserted Explanations vide Finance Act, 2012, whereafter it became irrelevant whether or not the assessee has control or possession of the scientific equipment, that the claim of the assessee therein that payment made was for service and it was not a case of transfer was rejected. Therefore, to that extent, the decision in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra), in our considered opinion, stands overruled and cannot be relied upon as a precedent.”
20. In view of the above discussion, we reiterate the view of the Hon’ble Supreme Court and hold that the Explanations 4 to 6 to Section 9(1)(vi) of the Income Tax Act are not a clarificatory in nature but expansion of the definition of the term ‘Royalty’, with prospective effect from 01.04.2012. Since ______________ Page Nos.15/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016 the term ‘computer software’ introduced in Explanation 3 for the first time with effect from 1st April 1991, it is obvious that Explanation 4 cannot be applied to the right of computer software use with effect from 1 st June 1976. When the said remittance made to the non-resident company is not a royalty, then Tax Deduction at Source under Section 195 does not arise. The law does not demand the impossible (Lex non cogit ad impossibilia).
21. Since the remittance to the non-resident company is not liable to be taxed in India, the need to deduct TDS does not arise. Hence, action under Section 40(a)(i) and the consequential action under Section 201 of the Act does not arise.
22. As a result, following the judgement of the Co-ordinate Bench of this Court rendered in M/s.Cognizant Technology Solution Pvt. Ltd vs. CIT, Chennai order dated 25.11.2025, the substantial questions of law are answered in favour of the assessee and against the Revenue. ______________ Page Nos.16/18 https://www.mhc.tn.gov.in/judis Tax Case (Appeals).Nos.651 to 653 of 2016
23. In fine, the Tax Case Appeals are Allowed. There shall be no order as to costs.
(Dr. G.JAYACHANDRAN, J.) & (SHAMIM AHMED, J.) 30-04-2026 Index :Yes/No. Neutral Citation :Yes/No. To,
1. The Income Tax Appellate Tribunal, Chennai.
2. The Assistant Commissioner of Income Tax, Company Circle, I. 121 Nungambakkam High Road, Chennai 600 034.
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& SHAMIM AHMED, J.
bsm Pre-Delivery common judgment made in Tax Case (Appeals) Nos.651 to 653 of 2016 30-04-2026 ______________ Page Nos.18/18 https://www.mhc.tn.gov.in/judis