Payments for bandwidth services via international private leased circuit to non-resident not 'royalty' under pre-2012 law; Explanations 4-6 to Section 9(1)(vi) prospective, not clarificatory. No TDS under Section 195 or disallowance under Section 40(a)(i).

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.

(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, 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 Year2003-04) 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 pro