2005-VIL-362-ITAT-BLR

Equivalent Citation: [2005] 3 SOT 529 (BANG.)

Income Tax Appellate Tribunal BANGALORE

IT APPEAL NOS. 902 TO 907 (BOM.) OF 2002

Date: 24.01.2005

SOFTWARE TECHNOLOGY PARKS OF INDIA

Vs

INCOME-TAX OFFICER, TDS-1

BENCH

GOPAL CHOWDHURY AND DEEPAK R. SHAH, JJ.

JUDGMENT

Deepak R. Shah, Accountant Member.—All these appeals by the assessee are arising out of the order of learned Commissioner of Income-tax (A-V), Bangalore, dated 28-2-2002. The first three appeals are directed against the order under section 201(1) holding the assessee as assessee in default for failure to deduct tax as required under section 195 of the Income-tax Act in respect of payments made to several USA based companies. The payment was made for use of International Leased Telecom Lines. The other three appeals are against levy of interest under section 201(1A) for failure to deduct tax. Since common issues are involved in all these appeals, they are disposed off by common order.

2. At the time of hearing Learned Departmental Representative raised a preliminary objection to the effect that though the assessee is a public charitable trust registered under the Societies Registration Act, it is functioning like a Government Department. Thus for pursuing the appeal before the Tribunal, the assessee is required to obtain necessary clearance from the High Power Committee set up by the Government of India called Committee on Disputes (CoD). Since the assessee has not obtained such approval, the appeals cannot be allowed to be prosecuted. For this purpose, he relied upon the decision of Hon’ble Supreme Court in the case of ONGC v. Collector of Central Excise [1992] 104 CTR (SC) 31 and in the case of Mahanagar Telephone Nigam Ltd. v. Chairman, CBDT [2004] 267 ITR 647. Learned Departmental Representative submitted that the assessee was set up under the Memorandum of Association. The registered Office of the assessee is C/o Department of Electronics, Government of India. The various clauses of Memorandum of Association regarding acceptance of gifts from foreign Government through Government of India, requirement of obtaining prior approval of the Government for acquiring, holding and disposing of the property, power of Central Government to issue directions for effective functioning of assessee and obligation of assessee to carry out such directions, constitution of Governing Council consisting of only Government Officers and all the signatories to the society are Government Servants makes the assessee as deemed Government Department. Hence, any litigation between two Government Departments cannot be pursued without approval of the Central Government. Apart from the above reasons, he cited the following rules and regulations in the Memorandum of Association of the society to treat the assessee as a deemed Government Department :

(i)Rule 3.1 - All members of the society are Government Officers.

(ii)Rule 3.2 - Government reserves right to add or delete or substitute or change members of the society or reorganize membership of the society.

(iii)Rule 4.2 - Government of India has power to re-constitute Governing Council.

(iv)Rule 6 - Assessee is under administrative control of the Department of Electronics, Government of India.

(v)Rule 8.4 - The disputes within the society are to be resolved by Minister in-charge of the Department of Electronics and the Finance Minister.

(vi)Rules 9.1(d) & 9.2(e ) - Framing, varying and repealing Rules and Regulations and Procedures for management of the society and affairs relating to employees are to be done with the approval of the Government of India.

(vii)Rules 9.1(a) & 2.5 - The Governing Council is the apex body for the overall administration and management of the society. The Chairman of the Governing Council is the Secretary, department of Electronics, Government of India. He will preside over meeting of the Council.

(viii)Rule 12 - Minister has over-riding power of amending or modifying or rescinding any decision of the Government Counsel or of the Standing Executive.

(ix)Rules 14.1 & 15.1 - Appointing authority of the Director General, Member Secretary & Director is the Secretary, Government of India.

(x)Rule 17.1 - Substantial finance to the STPI to discharge its functions effectively is provided by the Government of India.

(xi)Rule 17.5 - Maintenance of accounts and records is to be done according to the guidelines, norms and procedures laid down by the Government of India.

(xii)Rules 17.9 & 17.11 - Accounts of the society are open to the Audit by C&AG and Department of Electronics, the Government of India.

(xiii)Rule 17.10 - All decisions regarding financial matters are to be taken in consultation with the Departmental Advisor, Department of Electronics, Government of India.

(xiv)Rule 19.3 - Rules and regulations of the society can only be changed after obtaining approval from Department of Electronics, Government of India.

He also submitted that the real character of the society is of Government Department as all Administrative, Financial and Personnel functions of the society are totally controlled by the Government of India. Thus necessary approval from the COD is required to be obtained for pursuing the appeal before the Tribunal.

3. Learned counsel for assessee Shri KR Pradeep submitted that the assessee is registered as a public charitable trust under the Societies Registration Act. The assessee has been filing its return of income in the status of AOP since several years. The assessee is registered under section 12A of the Income-tax Act. The objectives of the assessee are charitable in nature and accordingly the assessee enjoys exemption under sections 11 and 12 of the Income-tax Act. The Government to carry out avowed objectives of public good has set up several trusts to oversee that the ultimate beneficiaries are properly benefited. However, the Government never receives any benefit out of such trusts to hold it as a Government Department or public sector enterprise. Thus no approval is required to be obtained from COD to pursue these appeals.

4. We have carefully considered rival submissions and relevant facts of the case. Under the Income-tax Act as such there is no requirement to obtain necessary approval from COD. However, Hon’ble Supreme Court in its order dated 11-10-1991 was concerned regarding litigation between Government and public sector undertakings with another Government Department. Since both the litigants were either Government Departments or in which the Government has beneficial interest, the Hon’ble Supreme Court directed the Central Government to set up a Committee to monitor the disputes and it was also directed that before entertaining any litigation Court will insist on a clearance from the Committee to be set up by the Government. Hon’ble Supreme Court in the case of ONGC (supra) held thus :

"The Government of India shall set-up a Committee consisting representatives from the Ministry of Industry, the Bureau of Public Enterprises and the Ministry of Law, to monitor disputes between Ministry and Ministry of Government of India, Ministry and public sector undertaking of the Government of India and public sector undertakings in between themselves, to ensure that no litigation comes to Court or to a Tribunal without the matter having first examined by the Committee and its clearance for litigation. Government may include a representative of the Ministry concerned in a specific case and one from the Ministry of Finance in the Committee. Senior Officers only should be nominated so that the Committee would function with status, control and discipline. It shall be the obligation of every Court and every Tribunal where such a dispute is raised hereafter to demand a clearance from the Committee in case it has not been so pleaded and in the absence of the clearance, the proceedings would not be proceeded with. The Committee shall function under the ultimate control of the Cabinet Secretary but his delegate may look after the matters. The Court would expect a quarterly report about the functioning of this system to be furnished to the Registry beginning from 1st Jan., 1992. This direction may be communicated to every High Court for information of all the Courts subordinate to them."

In the light of the above decision, the CBDT issued following Circular No. F.No. 279/222/91-ITJ Pt-II, dated 13-2-1995 :

To :

The Chief Commissioners of Income-tax and Directors General of Income-tax.

Subject:Settlement of disputes between one Government Department and another and one Government Department and a Public Enterprise and Public Enterprise and another.

***

I am directed to refer to Board’s letter F.No. 279/222/91-ITJ, dated 17-3-1992 enclosing Cabinet Secretariat O.M. No. 53/3/6/91-Cab., dated 31-12-1991 as well as to Board’s letter F.No. 279/222/91-ITJ (Pt.), dated 3-2-1994 enclosing Cabinet Secretariat O.M. No. 53/3/10/94-Cab., dated 24-1-1994 on the above subject. All matters before any Court or Tribunal involving dispute between a Government Department and another and one Government and a Public Enterprise and Public Enterprises inter se requires the approval of the High Power Committee set up by the Cabinet Secretariat vide its Office Memorandum dated 31-12-1991 (supra). Such approval is required to be taken before the filing of the appeal/petition.

4.1 From the aforesaid decision of Hon’ble Supreme Court as well as circular of CBDT, it is seen that whenever there is a dispute between Ministry and Ministry of Government of India, Ministry and public sector undertaking of Government of India and public sector undertakings in between themselves, necessary approval from the Committee on Disputes is required. The circular of CBDT is also in compliance to the directions of Hon’ble Supreme Court in ONGC’s case (supra). Thus only if the litigation is between aforesaid litigants, necessary approvals are to be insisted upon. In the present case, it is seen that the assessee is a public charitable trust registered under the Societies Registration Act and the assessee has been filing its return in the status of a public trust (AOP). The trust is registered under section 12A of the Act. The trust is also enjoying exemption under sections 11 & 12 of the Act. Thus it can be said that the beneficiaries are public at large and not the Government of India. The assessee cannot be treated as Government Department also as under the scheme of Income-tax Act, Government Departments are not subject to any Income-tax on its income. Under the various schemes of Government, if a unit set up for export of software, various benefits are conferred upon them, some of which are under the Income-tax Act like exemption under sections 10A, 10B, 80HHC, 80HHE, etc. To ensure that the units comply with the directives of the Government these units to claim exemption/deduction under the Income-tax Act are required to be registered with the Software Technology Parks of India, i.e., the assessee before us. Thus the assessee is to monitor such units and work for the development of such units. Thus the assessee cannot be considered as a Government Department but an independent body whose beneficiaries are public at large and not the Government of India. The assessee cannot be considered as a public sector undertaking also as the public sector undertakings are set up for commercial consideration and not for charitable objectives, the beneficiaries of which are public at large. The status of assessee as charitable trust itself goes against the principle to hold it as a public sector undertaking or a Government Department as Government of India is not beneficially interested in the assessee trust. It is only monitoring the activities of the assessee trust so that the major objectives of Government to grant benefits to units registered with STPI are properly monitored. We accordingly hold that the assessee is not a Government Department or a public sector undertaking so as to obtain necessary approval from the Committee on Disputes. We accordingly proceed to dispose of the appeals.

5. The facts of the case are as under :—

5.1 In pursuant to its main objectives as mentioned above, the appellant was engaged in the business of providing end to end communication facility to various companies in and around Bangalore and such user companies avail the facility provided by the appellant to transfer and receive data through international communication channel. For this purpose, the appellant has entered into agreement with various foreign companies who are providing the necessary bandwidth to the appellant which in turn provides the same to the end users for the purpose of their data transmission. The technology and methodology involved in making available the bandwidth along with its attendant services would be adverted to at the appropriate time in subsequent paragraphs. As stated above, the appellant has entered into agreement with various foreign companies which are generally termed as ‘internet services agreement’ as per which such international service providers provide the appellant with the necessary bandwidth along with a package of services, in return for a consideration (the significant features of a typical agreement would be adverted to at the appropriate time in the succeeding paragraphs). The details of payment made by the appellant to the non-resident companies are mentioned by him at pages 1 and 2 of the order. The payments have been made to several USA based companies viz., MCI World. Com., M/s. Vunet Technologies INC., M/s. Loral Orion Services, M/s. AT & T Communications, M/s. Cables & Wireless Inc. and M/s. Teleglobe International. Payments to the extent of Rs. 1,53,60,198, Rs. 2,07,09,915 and Rs. 4,93,47,444 in toto have been made by the appellant to these non-resident companies respectively during the financial years 1998-99, 1999-2000 and 2000-01 (up to 31-12-2000) relevant to the assessment years 1999-2000, 2000-01 and 2001-02. The case of the Assessing Officer is that since the impugned payments were made to non-residents, the appellant was required to deduct tax at source in respect of the amounts so remitted under section 195 of the Act which was not done. Accordingly, a notice under section 201 was issued on 29-12-2000 asking the appellant to state the reasons for such non-deduction. It was contended by the appellant that the impugned payments were made to the foreign companies outside India for the use of international leased lines and, therefore, no part of the income in respect of such companies could be deemed to accrue or arise in India, and hence TDS provisions were not applicable. It was further contended that as per the Double Taxation Avoidance Agreement with USA the business profits of such companies was exempted from tax in India as per Article 7 of the said agreement, since the recipient did not have any PE in India. The Assessing Officer rejected the contention so raised observing that the receipt of such payments by foreign companies would constitute their income chargeable to tax in India, as the same represented fees received for providing technical services, as per section 9(1)(vii) of the Income-tax Act read with Article 12(4)(b) of the Double Taxation Avoidance Agreement, inasmuch as, the impugned payment made by the appellant to the foreign companies was for making available the ‘process’, (explained at length by the Income-tax Officer) whereby the signal is transmitted through a medium and is received by the user at the other end and, therefore, the payment received by the recipient for making available the said ‘process’ partook the character of ‘fees for technical services’ in the hands of the recipients as per section 9(1)(vii) of the Act and also as ‘fees for included services’ as defined in Article 12(4)(b ) of the Double Taxation Avoidance Agreement between India and USA read with the MoU in respect of the said treaty, between these two countries. In view of this, the Assessing Officer was of the opinion that the payments received by the non-resident companies were sums chargeable to tax in India and hence was liable for deduction of tax at source in respect of such payments/remittances, the ITO held the appellant to be an assessee in default under section 201(1) of the Act and also levied interest under section 201(1A). The amount of default under section 201(1) as also the interest leviable under section 201(1) was separately determined for each assessment year, though a single order was passed. Learned CIT(A) confirmed the same and hence these appeals.

5.2 Learned counsel for assessee Shri Pradeep submitted that identical issue was before this Tribunal in the case of Wipro Ltd. v. ITO [2003] 80 TTJ (Bang.) 191¹. wherein the Hon’ble Tribunal held thus:

"The assessee has paid the sum for services as set out in the agreement. As per the agreement the assessee is to use the standard facility provided. The agreement for provision of services in the case of AT&T is titled as Master Service Agreement. The standard format refers to menu of service which can be utilized by customers. These master agreements are available on internet and can be downloaded by anyone. The pricing patterns are standard with an offer for bulk discounts. The services referred to in the agreements are various types of telecom services which are offered to different types of customers depending upon the volume of traffic. The invoices by AT&T are charges for utilization of customer based circuits. The invoices are periodical in nature and each invoice has a different amount indicating varying volume of services utilized at various point of time. Shorn of higher commercial and technical lingo in simple terms it is nothing but regular documents involved in utilization of telecom services. There is no document which evidences that the appellant was provided with any technology or technical services for encapsulation or amplification or conversion of light signal into magnetic signal or vice versa or any evidence for hiring or utilization of satellite by the appellant. The Department is clearly confused in the nature of services rendered by the telecom companies to the appellant. Hence, there is no evidence to support any rendering of technical services to the appellant. Further, it is an undisputed fact that while unlinking the data from customers premises in India, VSNL offers similar services to the appellant. Such service is not regarded as technical services under section 9(1)(vii) so as to attract the TDS provisions under section 194J. Partly of reasoning demands similar treatment even if the services are provided by a private party or a non-resident. Department has no issue on the service provided by VSNL or STPI. It is inexplicable as to how the same becomes an issue when such a service is provided by a private party or a non-resident. When services are provided between the telecom operator and the customer the same would not amount to technical service or royalty. For these reasons the amount paid cannot be considered as ‘fees for technical services’ under section 9(1)(vii). - Skycell Communications Ltd. v. Dy. CIT [2001] 170 CTR (Mad.) 238 : (2001) 251 ITR 53 (Mad.) and Dy. CIT v. Asia Satellite Telecommunications Co. Ltd. [2003] 78 TTJ (Delhi) 489 relied on. [Para 5.4]

The liability under the Act does not arise due to operation of DTAA but the charging provision of the Act. So long as the amount paid is not taxable under the Act, the clause in the DTAA cannot bring the charge. DTAA is a relief giving mechanism and operates as relief against liability in resident country and host country. In this case since there is no domestic liability, on this score itself DTAA would not be applicable and no liability will arise on account of DTAA. It is an accepted position in law that if domestic law exempts certain income or if domestic law is inapplicable in a given circumstances, DTAA would be inapplicable as there is no double taxation. It is also correct that DTAA between India and USA would not be applicable insofar as services are rendered in other countries other than these two countries. To that extent the order suffers from incorrect application of DTAA provisions. Insofar as applicability of Article 12(4) it is clear from facts in example No. 4 and the analysis to it in the memorandum, unless the technical service or a process is made available the article would not apply. In this case a finding is already given that no technical service or process has been made available to the appellant. Hence, this article does not apply to this case. Accordingly, there is no liability against the appellant under DTAA between India and USA. [Para 6.4]

Factually no process has been made available to the appellant, hence, applicability of section 9(1)(vi) does not arise. Therefore, the appellant is not liable even under section 9(1)(vi). [Para 7.4]

The amount paid to non-residents are not their income accruing in India under section 9(1)((vii) or section 9(1)(vi) or DTAA. The assessee has paid the amount to the non-residents outside India for services rendered outside India. Hence, the liability for TDS under section 195 does not arise in the hands of appellant payer. Accordingly, the orders passed by the Assessing Officer under section 201(1) stands cancelled and there is no liability for TDS against the appellant on the basis of the said order and the liability raised by the Assessing Officer is deleted. Hence, the appellant is entitled to consequential relief in respect of interest levied under section 201(1A). The assessing officer is directed to grant the relief accordingly." [Para 9.2]

6. Learned Departmental Representative Shri Ajit Korde fairly submitted that the issue is identical to the case in Wipro Ltd. (supra).

7. In view of the submissions by both the counsels and in the absence of any contrary decisions, respectfully following the aforesaid order of ITAT, Bangalore to which one of us (AM) is a signatory, we hold that the assessee was not required to deduct tax under section 195 in respect of payments made to various USA based companies mentioned above. Accordingly, we hold that the assessee is not required to be treated as an assessee in default under section 201(1) of the Act. Since the assessee is not treated as an assessee in default under section 201(1) of the Act, no interest is also chargeable under section 201(1A) of the Act.

In the result, all the appeals are allowed.

 

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