Amit Shukla, Judicial Member - The aforesaid appeals has been filed by the assessee against separate impugned orders dated 05.11.2014 and 17.11.2014 passed by CIT(A)-14, Mumbai in relation to the order passed under sections 201(1) and 201(1 A) for the assessment years 2011-12 and 2012-13 respectively. Since the issues involved in both the appeals are common arising out of identical set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order. For the sake of reference, grounds of appeal for the assessment year 2011-12 are being reproduced hereunder:—
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming u/s 201(1) and 201(1A) of the Income Tax Act, 1961, without considering the assessee's grounds detailed submissions, and without appreciating the nature of the transactions in the present case.
2. The learned CIT (A) erred in considering the assessee to be in default on the basis that the assessee had deducted tax under s. 194C instead of s. 194J. She failed to appreciate that tax was properly deducted u/s 194C, and that s. 194J had no application whatsoever in the facts of the case.
3. The learned CIT (A) erred in invoking amendments under the Finance Act, 2012, in order to hold the assessee as being in default. She failed to appreciate that for the purpose of orders u/s 201, the law as on the statute-books at the day of payment alone has to be considered, and subsequent amendments (whether retrospective or not) can only affect the ultimate chargeability in the hands of the recipient, but cannot result in any retrospective liability u/s 201.
4. The learned CIT (A) failed to appreciate that the payments made in the present case are not in the nature of royalty or fees for technical services at all. She failed to appreciate that the payments are not covered even under the amended definition of royalty. In particular (but without prejudice to the generality of this ground), the learned CIT(A) failed to appreciate that the payment in the present case could not be said to be "consideration... for... the transfer of all or any rights.., in respect of a... process." She erred in failing to draw a distinction between considerations for transfer of rights in respect of a process' on the one hand, and 'consideration for a facility/service provided by the recipient without any transfer of rights in respect of a process' on the other.
5. The learned CIT(A) erred in relying on Explanation 5 to s. 9(1)(vi) and the decision of the Madras High Court in the case of Verizon and other decisions cited by her. She failed to appreciate that these decisions and the explanation have no bearing in the facts and circumstances of the present case. She failed to appreciate that, on a proper analysis of the nature of the transaction in the present case, the said Explanation/cases were inapplicable/distinguishable.
6. The learned CIT(A) failed to appreciate that the income tax department itself had accepted that similar transactions would be covered only under s. 194C and not under s. 194J. In the circumstances, the orders under s. 201 were entirely unwarranted.
7. The learned CIT(A) failed to appreciate that there was no specific revenue loss demonstrated by the Revenue, and in such circumstances, orders u/s 201 ought not to have been passed. She failed to appreciate that demonstration of revenue loss is a precondition to be satisfied by the Revenue before recourse can be had to s. 201.
8. The order of the learned CIT(A) is otherwise too contrary to law and contrary to the facts.
9. Assessee craves leave to amend/alter the above grounds. Each of the grounds is without prejudice to one another."
2. The facts in brief are that, the assessee company is engaged in the business of providing mobile message services.
It also operates SMS messaging platform that enables users to create Mobile Communities and broadcast messaging, that is, send bulk SMSs to Mobile Communities. The fact as summarized in the order of the CIT (A) qua the dispute is as under—
"i. The assessee is in the business of sending bulk SMS. Their clients are both government and private sector. The government client includes Income Tax, NFDC etc. The assessee to send SMS avails the service of the telecom operator like Tata Tele Services and made payment in the nature of Short Message Peer to Peer(SMPP) connectivity charges;
ii.Once an agreement is entered into between the Appellant and the telecom operator, the telecom operator creates customer's account from their end and provides IP addresses, user name and password to the Appellant. The appellant then integrates such details in its Application Programming Interface(API) system for transmitting bulk messages to the telecom operator without any access or control over the SMPP connectivity facility/telecom operator's server/network which are used by the telecom operators for transmitting messages;
iii. The Appellant receives the content of the message required to be sent as bulk SMSs from its client, pursuant to which the Appellant uses its own software and computer system to convert it in a form that could be transmitted to customers of various telecom operators; and
iv. Once the SMS is ready for transmission, the Appellant causes its system to connect with the system of the telecom operators to send the message in bulk.
3.2 The assessee has deducted tax u/s 194C from the payment made to Tata Teleservices whereas the AO has held that payment as SMS and short code charges is Royalty, therefore tax is to be deducted u/s 194J.Accordingly he has held the assessee to be assessee in default u/s 201(1) and has raised the tax demand of Rs.21,01,660/- and interest u/s 201 (1A) of Rs.7,56,597."
3. The assessee's case before the authorities below was that:
i. There is no machinery identifiable for sole use by the assessee;
ii. The appellant does not have any access is control over equipments;
iii. No separate operator or maintenance contract is there;
iv. Only standard connectivity is provided;
v. Even the Income Tax Department has deducted TDS u/s 194C on payment made to assessee;
vi. Further, the Revenue authorities itself have, while issuing certificate u/s 197 of the Act, treated the above payments to TTSL as contract payment liable to tax deducted at source u/s 194C of the Act. A copy of lower withholding tax certificate issued by the authorities in favour of TTSL wherein it has been mentioned that the above payments would constitute contract payments.
4. The Ld. CIT(A) held that, transmission of bulk SMS is through a "process" which falls within the category and ambit of definition of "Royalty" as provided in section 9(1)(vi) specifically in light of retrospective amendment brought by the Finance Act, 2012 w.r.e.f. 01.06.1996. The Ld. CIT (A) also referred to the decision of Madras High Court decision in the case of Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) [2014] 361 ITR 575/224 Taxman 237/[2013] 39 taxmann.com 70 (Mag.). Thus, the Ld. CIT (A) has held that the payment made by the assessee is covered under section 194J; therefore, assessee was liable to deduct tax under section 194J and not ection 194C. As regards the assessee's contention that, similar services provided to the Income Tax Department by the assessee, the TDS has been deducted under section 194C and not 194J, the Ld. CIT (A) held that the same is irrelevant because payment made by the assessee to the Tata Tele Services was liable to be deducted at a higher rate under section 194J. Accordingly, the order of the Assessing Officer was confirmed.
5. Before us, the Ld. Counsel Mr. Mihir Naniwadekar after explaining the entire facts submitted that, there is no payment which has been made for "usage of any equipment" nor can it be considered as "process". The assessee has entered into an agreement with Tata Tele Services Ltd for providing SMS connectivity which shall enable the customer to send SMS for promotional message or transactional message. The payment is made for connectivity charges. There is no equipment which has been transferred or any kind of technology which can be said to have been passed on from Tata Tele Services to the assessee. There is no proprietary information or process which has been passed on to the assessee. Further, in the regular assessment order u/s 143(3), no disallowance under section 40(a)(ia) have been made. Thus, assessee cannot be treated as assessee in default as assessee has deducted TDS under the correct provisions of the law which is under section 194C. Moreover, he submitted that, the assessee is providing similar services to the Income-tax Department and the department while making the payment has deducted TDS under section 194C. Therefore, different yardstick cannot be applied qua the same payment made by the assessee to TTSL. In support, he filed the sample copy of purchase order placed by the Income-tax Department with the assessee for bulk SMS services; sample copy of invoice raised by the assessee to the Department; and copy of some TDS certificates showing that Income-tax Department has deducted TDS under section 194C. Thus, he submitted that assessee has rightly deducted TDS under section 194C while making payment to Tata Tele Services Ltd. Regarding reliance placed on the decision of Madras High Court in the case of Verizon Communications Singapore (P.) Ltd (supra) he submitted that now this decision has been considered by the Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114/238 Taxman 577/68 taxmann.com 8, wherein the said decision has been considered and has been distinguished by the Hon'ble High Court. Further, he relied upon the decision of Hon'ble Delhi High Court in Technip Singapore Pte. Ltd v. DIT [2016] 385 ITR 408/240 Taxman 373/70 taxmann.com 233, wherein the Hon'ble High Court after referring to the decision of Asia Satellite Telecommunication Co. Ltd. v. DIT [2011] 332 ITR 340/197 Taxman 263/9 taxmann.com 168 (Delhi) have held that payment to be characterized as one for the use of equipment, factually the equipment must be used if there is no use of equipment for rendering the services then, it cannot be reckoned as "Royalty". Here in this case, admittedly, there is no use of equipment as held by the Assessing Officer and CIT(A).
6. On the other hand, Ld. DR strongly relied upon the definition of "royalty" as given in Explanation 2 to section 9(l)(vi) and submitted that, the payment made by the assessee is for the 'use of equipment' of Tata Tele Services Ltd and, therefore, same falls within the realm of "royalty". Thus, he strongly relied upon the order of the CIT(A).
7. We have heard the rival contentions and perused the relevant finding given in the impugned orders. The main issue in dispute is that, whether the assessee should have deducted the TDS under section 194C or 194J while making the payment made to Tata Tele Services Ltd. for connectivity charges. The assessee is in the business of sending bulk SMSs and for sending this SMS, it avails the services of Telecom Operators like, Tata Tele Services Ltd. Once the agreement is entered into between the assessee and the Telecom Operator, the telecom operator creates customers account from their end and provides IP address, user name and pass word to the assessee. The assessee then integrate such details in its Application Programming Interface System for transmitting bulk messages to the Telecom Operator without any access or control over any of the connectivity facilities or Tata Tele Services Server or Network which are only used by the Tata Tele Services for transmitting the messages. The assessee receives the content of the message which required to be sent as bulk SMSs from its client for which assessee used its own software and computer system to convert it in a form that could be transmitted to the customers of the various telecom operators. Once the SMS is ready for transmission, the assessee causes its system to connect with the system of the telecom operators to send the messages in bulk. Hence, the assessee has neither any access nor control over the equipments nor there is usage of any process or equipment which can be said to have been made available to the assessee. It is a kind of a standard connectivity facility which has been provided by the Telecom operator, nothing else. The agreement is more in the nature of works contract with the Telecom Operator for which the assessee has rightly deducted the TDS under section 194C. Even, the assessee from its customers, like Income-tax department for providing such services has received the payment which has been subjected" to TDS under section 194C. Thus, it cannot be held that the assessee is making any payment for use or right to use any equipment. Further, the concept of 'use' or 'right to use any equipment' alludes to the concept of 'leasing', which here in this case admittedly is not there. Much emphasis has been laid by the ld DR as well as by the CIT (A) that, it is a kind of a 'process' and, therefore, in view of Explanation 6 brought with retrospective effect by the Finance Act, 2012 whereby the 'process' includes transmission by satellite, cable, optic fiber or by any other similar technology whether or not such process is not secret. Even if such a contention of the Department is to be accepted, then whether at the time of making the payment where no such amendment was brought in the statute, can assessee be accepted to deduct the TDS? Here, the maxim of "lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has-been upheld by in catena of decisions including the ITAT Mumbai Benches in the case of Channel Guide India Ltd, v. Asstt. CIT [2012] 139 ITD 49/25 taxmann.com 25, wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, we hold that assessee was not liable to deduct TDS by treating the payment in the nature of 'Royalty' in terms of section 194J or in terms of retrospective amendment brought from subsequent date. Accordingly, assessee cannot be treated as assessee in default within section 201(1). In the result, order of the CIT(A) is set aside and the grounds raised by the assessee are allowed.
8. In view of our finding given above, the interest under section 201(1) automatically stands infructuous.
9. Similar grounds and issues involved in assessment year 2012-13, therefore, the grounds raised above along with reasoning given thereof to resolve the issues will apply mutatis mutandis in this year also. Accordingly, ground raised in the impugned appeal of the revenue stands partly allowed.
10. In the result, both the appeals of the assessee stands partly allowed.