Income Tax Appellate Tribunal - Bangalore
M/S Torry Harris Business ... vs Department Of Income Tax on 17 April, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH : BANGALORE BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER and SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER ITA No.1300/Bang/2014 (Assessment year: 2007-08) Assistant Commissioner of Income-tax, Circle 12(4), Bangalore. ... Appellant Vs. M/s.Torry Harris Business Solutions (P) Ltd. No.71, Sona Towers, Millers Road, Bangalore-560052. ... Respondent PAN: AAACT7287M Appellant by: Mrs.Sahanzeb Akhtar, CIT(DR). Respondent by: Shri R.Srinivasan, CA. Date of hearing : 31/03/2015. Date of pronouncement: 17/04/2015. O R D E R
Per Smt. P.MADHAVI DEVI, JM:
This appeal filed by the Revenue is against the order of the CIT(A)-III, Bangalore, dated 14/07/2014 in holding that (i) internet services i.e. leased line benefits/broadband services are not in the nature of technical services and do not attract the provisions of sec.194J of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short], and (ii) directing the Assessing Officer (AO) to exclude reimbursement of certain expenses both ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
from the export turnover as well as from the total turnover for the purpose of computation of deduction u/s 10A of the Act for the assessment year 2007-08.
2. Brief facts of the case are that the assessee-company which is in the business of development of computer software, had filed its return of income for the assessment year 2007-08 on 31/10/2007 declaring a total income of Rs.69,32,820/- after claiming deduction of Rs.19,60,93,025/- u/s 10A of the Act.
During the assessment proceedings u/s 143(3) read with sec.144C of the Act, the AO observed that the assessee had claimed to have paid lease-line expenses of Rs.36,11,140/- and debited the same under the head 'communication expenses' but did not deduct TDS in respect of the aforesaid expenditure. The AO was of the opinion that the services rendered were technical services and therefore TDS provisions are applicable. He, therefore, disallowed the sum of Rs.36,11,140/- u/s 40(a)(ia) of the Act.
4. Aggrieved, the assessee preferred an appeal before the CIT(A) who deleted the addition by following the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Estel Communications Pvt. Ltd. (217 CTR 102) wherein it was held that when there was a simple purchase of Internet Band-width it cannot be held that the payment was for technical services.
ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
Against the relief given by the CIT(A), the revenue is in appeal before us by raising grounds 1 & 2 on this issue.
5. The learned Departmental Representative supported the order of the AO while the learned counsel for the assessee submitted that the same issue had arisen in the assessee's own case for the assessment year 2009-10 and 'C' bench of this Tribunal, to which both of us i.e. Judicial Member and the Accountant Member are signatories, had decided the issue in favour of the assessee by following the decisions of the Hon'ble Delhi High Court (cited supra) as well as the Hon'ble Bombay High Court in the case of Skycell Communications Ltd. vs. DCIT (251 ITR 53).
6. Having regard to the rival contentions and the material on record, we find that the issue is covered in favour of the assessee by the decision of this Tribunal in the assessee's own case for assessment year 2009-10 to which both of us are signatories. The relevant portion of the Tribunal order is reproduced hereunder:
21. We have perused the orders and heard the rival contentions. Claim of the assessee was denied by the AO for want of deduction of tax at source. Payments made by the assessee were undisputedly for purchasing inter-net band width. DRP had relied on the definition of 'royalty' given in Explanation-2to section (9)(1)(vi) of the Act and held that royalty included payments effected for use of any process. Reliance was also placed on Explanation-6 inserted below Sec.9(1)(vi), through Finance Act, 2012 with retrospective effect from 1-4- 1961 which mentions that process. used need not be secret and will include transmission by Satellite Cable, ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
optic fiber or any other similar technology. However, we find that Hon'ble Delhi High Court in the case of M/s Arathi Cellular Ltd., (supra) had held under at paras-10 to 21 of its judgment;
10. Sec. 194J which relates to 'fees for professional or technical services', so much as is relevant, reads as under :
"194J. (1) Any person, not being an individual or an HUF, who is responsible for paying to a resident any sum by way of--
(a) fees for professional services, or
(b) fees for technical services, ...............
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to five per cent of such sum as income-tax on income comprised therein :
Explanation : For the purposes of this section,--
(a) 'professional services' means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of s. 44AA or of this section;
(b) 'fees for technical services' shall have the same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9;
11. It is apparent that in respect of fees for technical services tax is to be deducted at source at 5 per cent (as it then was). It is also clear that the expression 'fees for technical services' has the same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9. The said Expln. 2 reads as under :
ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
"Explanation 2 : For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'."
The aforesaid Explanation makes it clear that 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any 'managerial, technical or consultancy services' but does not include consideration for any construction, assembly, mining or like project in the country by the recipients or consideration which would be income of the recipients chargeable under the head 'salaries'. The said definition is in two parts. The first part is 'means and includes' type of definition and the second part is 'does not include' definition. In the present appeals we are not concerned with the second part. The entire focus is attracted to the first part and that too, to the expression 'consideration for the rendering of any managerial, technical or consultancy services'. It is only if the payments made by the respondents/ assessees to MTNL/other companies in respect of interconnect/port access charges fall within the ambit of this expression that the said payments could be regarded as fees for technical services as contemplated under s. 194J of the said Act.
12. In Skycell (supra), a learned Single Judge of the Madras High Court noted that installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee. It was also held that technical service referred to in Expln. 2 to s. 9(1)(vii) contemplated the rendering of a 'service' to the payer of the fee and that mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services. We find ourselves to be in agreement with the views expressed by the learned Single Judge of the Madras High Court in Skycell ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
(supra). However, we still have to deal with the submissions made by the learned counsel for the appellant/Revenue that the payments that were considered in the case of Skycell (supra) were those made by a subscriber to the cellular mobile telephone facility provider and not by one cellular network provider to another. For this purpose, we must examine the appeals at hand de hors the decision of the Madras High Court in Skycell (supra).
13. We have already pointed out that the expression 'fees for technical services' as appearing in s. 194J of the said Act has the same meaning as given to the expression in Expln. 2 to s. 9(1)(vii) of the said Act. In the said Explanation the expression 'fees for technical services' means any consideration for rendering of any 'managerial, technical or consultancy services'. The word 'technical' is preceded by the word 'managerial' and succeeded by the word 'consultancy'. Since the expression 'technical services' is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable.
The said rule is explained in Maxwell on The Interpretation of Statutes (Twelfth Edition) in the following words:
"Where two or more words which are susceptible of analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general."
This would mean that the word 'technical' would take colour from the words 'managerial' and 'consultancy', between which it is sandwiched. The word 'managerial' has been defined in the Shorter Oxford English Dictionary, Fifth Edition as :
"of pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment, etc."
The word 'manager' has been defined, inter alia, as :
"a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
organization etc.; a person controlling the activities of a person or team in sports, entertainment, etc."
It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression 'manager' and consequently 'managerial service' has a definite human element attached to it. To put it bluntly, a machine cannot be a manager.
14. Similarly, the word 'consultancy' has been defined in the said Dictionary as 'the work or position of a consultant; a department of consultants.' 'Consultant' itself has been defined, inter alia, as 'a person who gives professional advice or services in a specialized field.' It is obvious that the word 'consultant' is a derivative of the word 'consult' which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said dictionary as 'ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action'. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.
15. From the above discussion, it is apparent that both the words 'managerial' and 'consultancy' involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the Rule of noscitur a sociis, the word 'technical' as appearing in Expln. 2 to s. 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnection/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Expln. 2 to s. 9(1)(vii) of the said Act. This is so because the expression 'technical services' takes colour from the expressions 'managerial services' and 'consultancy services' which necessarily involve a human element or, what is now a days fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection/port access do not involve any human interface and, therefore, the ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
same cannot be regarded as 'technical services' as contemplated under s. 194J of the said Act.
16. Since we have applied the rule of noscitur a sociis, it would be necessary to indicate that this rule or principle has been applied and accepted by the Supreme Court whenever the meaning of a word, which falls within a group of words, is unclear and the intention of the legislature is doubtful. In Godfrey Phillips India Ltd. & Anr. vs. State of U.P. & Ors. (2005) 194 CTR (SC) 257 : (2005) 2 SCC 515, a Constitution Bench of the Supreme Court was considering the meaning of the word 'Luxuries' as appearing in Entry 62 of the List II of the VIIth Schedule to the Constitution which empowers the State legislature to make laws with respect to 'taxes on luxuries including taxes on entertainment, amusement, betting and gambling'. The Supreme Court was of the view that the general meaning of 'luxury' had been explained or clarified and must be understood in a sense analogous to that of the less general words such as 'entertainment', 'amusements', 'gambling' and 'betting', which were clubbed with it. The Supreme Court, employing the said principle of noscitur a sociis, noted that this principle of interpretation had received the approval of the Supreme Court in an earlier decision in Rainbow Steels Ltd. vs. CST (1981) 2 SCC 141. The Supreme Court also noted that earlier, indiscriminate application of this rule was doubted in the case of The State of Bombay vs. The Hospital Mazdoor Sabha AIR 1960 SC 610. However, after referring to the said decision (Hospital Mazdoor Sabha), the Supreme Court in Godfrey Phillips India Ltd. & Anr. (supra) observed that they did not read the said decision as excluding the application of the principle of noscitur a sociis to the case before them inasmuch as it had been amply demonstrated that the word 'luxury' in Entry 62 was doubtful and had been defined and construed in different senses. The Supreme Court further observed as under :
"81. We are aware that the maxim of noscitur a sociis may be a treacherous one unless the 'societas' to which the 'socii' belong, are known. The risk may be present when there is no other factor except contiguity to suggest the 'societas'. But where there is, as here, a term of wide denotation which is not free from ambiguity, the addition of the words such as 'including' is sufficiently indicative of the societas. As we have said, the word 'includes' in the present context ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
indicates a commonality or shared features or attributes of the including word with the included."
17. In the appeals before us it is obvious that the meaning of the expression 'technical services' by itself, is far from clear. It is also clear that the word 'technical' has been used in the 'society' of the words 'managerial' and 'consultancy'. In such a situation, the rule would clearly apply and, therefore, the expression 'technical services' would have to take colour from the expressions 'managerial services' and 'consultancy services'.
18. To conclude the discussion on the application of the rule of noscitur a sociis, we think that a reference to the Supreme Court decision in the case of Stonecraft Enterprises vs. CIT (1999) 153 CTR (SC) 86 : (1999) 3 SCC 343 would be apposite. In that case the Supreme Court was required to interpret the provisions of s. 80HHC(2)(b) of the said Act relating to asst. yrs. 1985-86, 1987-88 and 1988-89. In the said sub-s. (2)(b) of s. 80HHC, it was provided that the section did not apply to the following goods or merchandise, namely :
(i) mineral oil; and
(ii) minerals and ores.
The question that arose before the Supreme Court was whether granite fell within the meaning of the word 'minerals'. The contention of the assessee before the Supreme Court was that while granite was a mineral in the general sense, it was not a mineral for the purposes of s. 80HHC and, therefore, the deduction provided for therein was available to the assessee who was in the business of exporting granite. The Supreme Court noted the arguments of the learned counsel for the assessee based upon the doctrine of noscitur a sociis that the word 'minerals' in s. 80HHCshould be read in the context of the words 'ores' which it was associated with and must draw colour therefrom. It was submitted that the word 'minerals' must be read as referring only to such minerals as are extracted from ores and not others. While the Supreme Court agreed that the doctrine of noscitur a sociis was applicable, it held that the word 'minerals', in sub-s. (2)(b) of s. 80HHC must be ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
read in the context of both 'mineral oil' and 'ores' and not just 'ores'. The Supreme Court held that these three words taken together are intended to encompass all that may be extracted from the earth. Consequently, the Supreme Court held that all minerals extracted from the earth, granite included, must, therefore, be held to be covered by the provisions of sub-s. (2)(b) of s. 80HHC, and the exporter thereof was, therefore, disentitled to the benefit of that section.
19. From this decision, it is apparent that the Supreme Court employed the doctrine of noscitur a sociis and held that the word 'minerals' took colour from the words 'mineral oil' which preceded it and the word 'ores' which succeeded it. A somewhat similar situation has arisen in the present appeals where the word 'technical' is preceded by the word 'managerial' and succeeded by the word 'consultancy'. Therefore, the word 'technical' has to take colour from the word 'managerial' and 'consultancy' and the three words taken together are intended to apply to those services which involve a human element. This concludes our discussion on the applicability of the principle of noscitur a sociis.
20. Before concluding we would also like to point out that the interconnect/port access facility is only a facility to use the gateway and the network of MTNL/other companies. MTNL or other companies do not provide any assistance or aid or help to the respondents/assessees in managing, operating, setting up their infrastructure and networks. No doubt, the facility of interconnection and port access provided by MTNL/other companies is 'technical' in the sense that it involves sophisticated technology. The facility may even be construed as a 'service' in the broader sense such as a 'communication service'. But, when we are required to interpret the expression 'technical service', the individual meanings of the words 'technical' and 'service' have to be shed. And, only the meaning of the whole expression 'technical services' has to be seen. Moreover, the expression 'technical service' is not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions 'managerial service' and 'consultancy service' as appearing in Expln. 2 to s. 9(1)(vii) of the said Act. Considered in this light, the expression 'technical service' would have reference to only technical ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
service rendered by a human. It would not include any service provided by machines or robots.
21. Thus, it is clear, whether we follow the line of reasoning taken in Skycell (supra) or not, the result is the same. The interconnect charges/ port access charges cannot be regarded as fees for technical services. Consequently, both the questions are answered against the Revenue and in favour of the assessees.
Their Lordships had followed the decision of the Hon'ble Mumbai High Court in the case of Sky cell (supra), though for different reasons. Assessee here had produced bills to show that payments effected thereof for purchasing inter-net band width. We are therefore, of the opinion that assessee was not bound to deduct tax at source u/s 194J of the Act on the payments effected to the service providers. Vis-à-vis application of Sec.194C, the AO was not able to show that the service provided were based on any specific contract entered by the assessee with the service providers. We are therefore, of the opinion that disallowance u/s 40(ia) of the Act was not warranted. Such a disallowance stands deleted. Ground no.13 of the assessee is allowed.
Respectfully following the same, we do not see any reason to interfere with the order of the CIT(A). Ground No.2 is accordingly rejected.
7. As regards ground Nos.3 and 4 on the second issue are concerned, we find that this issue also is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of Tata Elxsi Ltd., wherein it has been held that any expenditure which is excluded from the export turnover will have to be excluded from the total turnover as well for computing deduction u/s 10A of the Act. We find that the CIT(A) has followed the decision of the Hon'ble High Court in granting relief to the assessee. Therefore, we do not see any reason to ITA No.1300/Bang/2014 M/s.Torry Harris Business Solutions Pvt.Ltd.
interfere with the order of the CIT(A) on this issue as well. Thus grounds 3 & 4 are also rejected.
8. In the result, the revenue's appeal is dismissed.
Pronounced in the open court on 17th April, 2015.
sd/- sd/- (Abraham P George) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore