Introduction:
Tax Deducted at Source (TDS) is one of the modes of recovery of income tax. Chapter XVII of the Income Tax Act, 1961 contains the provisions relating to deduction of tax at source from salaries, payment to contractors, interest etc…
The Finance Act, 2012 has made an amendment to the definition of the term “Royalty” with retrospective effect from 01-06-1976. The amendment was made by inserting Explanation 4, 5 and 6 to the section 9(1) (VI).
This change has an impact on the payments made for internet charges, mobiles bills, telephone charges etc.
Issue after the Amendment:
whether TDS has to be deducted from internet bills, mobile bills etc.. as payment for broadband services, mobile services would amount “Royalty” after the amendment made by the Finance Act, 2012 retrospectively?
Analysis:
The relevant section that merits our consideration is Section 194J. Section 194J is attracted when the payment is made to a Resident.
The Relevant Portion of Provisions:
Section 194J: It provides that any person, not being an individual or Hindu undivided family, who is responsible for paying to a resident any sum by way of
- “ Fees for professional services” or
- “Fees for technical services” or
- ……………………………. Or
- “Royalty” or
- ……………
shall , at the time of credit of such sum to the credit of 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 10% of such sum as income – tax on income comprised therein;
Explanation: For the purpose of this section-
“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 the technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purpose of section 44AA or of this section;
The services of Internet facility, mobile phone services are not professional services as per the above definition.
“Fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of section 9(1).
Explanation 2 to Section 9(1)(vii) – For the purpose 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 head “Salaries”.)
In CIT v Bharati Cellular Ltd (2008) 175 Taxmann 573 (Delhi) it was held that the word 'technical' is preceded by word 'managerial' and is 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. This would mean that the word 'technical' would take colour from the words 'managerial' and 'consultancy' between which it is sandwiched. On going through the dictionary meaning the words 'managerial' and 'consultancy' involve a human element and both managerial and consultancy services are provided by humans. Consequently, applying the rule of noscitur a sociis, the word 'technical' have to construe as involving a human element. It would not include any service provided by the machines.
The services of Internet facility, mobile phone services are not provided by human beings, this part of the section is also not applicable.
Now, we turn our attention to the term “Royalty”
The explanation to Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi).
The Explanation 2 to Section 9(1)(vi) reads as under:
For the purpose of this clause, “Royalty” means consideration (including any lump sum consideration but
excluding any consideration which would be the income of the recipient chargeable under the head
“Capital gains”) for—
(i) The transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) The imparting of any information concerning the working of, or the use of, a patent, invention, model,design, secret formula or process or trade mark or similar property ;
(iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) The imparting of any information concerning technical, industrial, commercial or scientificknowledge, experience or skill ;
(iva) The use or right to use any industrial, commercial or scientific equipment but not including theamounts referred to in Section 44BB;
(v) The transfer of all or any rights (including the granting of a license) in respect of any copyright,
literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) The rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv),
(iva) and(v).
This definition of “Royalty” has been amended by inserting Explanation 4,5 and 6 to section 9(1)(vi) by Finance Act, 2012 with retrospective effect from June 1st , 1976.
Explanation 4 clarifies that royalty includes transfer of all or any right for use (or right to use) a computer software (including granting of a licence) irrespective of medium through which such right is transferred.
Explanation 5 clarifies that royalty includes any consideration in respect of any right, property or information, whether or not---
- The possession or control of such right, property or information is with the payer;
- Such right, property or information is used directly by the payer;
- The location of such right, property or information is in India.
Explanation 6 clarifies that the expression “ Process” includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fiber, or by any other similar technology, whether or not such process is secret.
For the purpose of section 194J, “Royalty” means royalty as given in explanation 2 to section 9(1)(vi). When explanation 4,5 and 6 inserted in section 9(1)(vi) by the Finance Act 2012, a reference of these explanations was not simultaneously incorporated in section 194J.
The amount payments made for telephone bills, internet bills etc does not constitute payment towards
Royalty as per above Explanation 2 to section 9(1)(vi) for following reasons:
- There is no transfer of rights or grant of license in respect of any patent, invention, model, design, secret formula, process or trademark or similar property.
The telecom companies or internet service providers do not impart any information concerning the working of or use of a patent, invention, model, design, secret formula, process or trademark or similar property.
- There is no payment for the use of any patent, invention, model, design, secret formula, process or trademark or similar property.
- The telecom companies or internet service providers do not impart any information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
- The payment is not for use or right to use any industrial, commercial or scientific equipment.
- The payment is not for transfer of all or any rights including grant of license in respect of any copyright, literary, artistic or scientific work.
- The payment is not for rendering of any services in connection with the activities referred to above.
It is relevant to note that 'right' is referred to in Explanation 2(i), (iva) and (v). In the instant case, there is no question of applicability of (i) and (v). Clause (iva) deals with industrial, commercial or scientific equipment. A telephone apparatus is a mobile instrument or other items at best can be instruments or appliances and not industrial/commercial/ scientific equipment
The Supreme Court in the case of BSNL Vs. UOI (2006) 145 STC 91, at Para 78 has held that providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting the toll gate. Of course, the toll payer will use the road or bridge in one sense. But the distinction with the sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of right to use. But the goods must be in existence and deliverable when the right is sought to be transferred.
The Supreme Court also held that the nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale.
It is a settled position of law that a particular provision refers to a term and the said term is referred to in another provision, only that other provision can be read. Nothing further can be read into the definition. In the instant case, Section 194J provides that Royalty shall have the same meaning as in Explanation 2 to Section 9(1)(vi). Therefore, nothing else can be read and since the applicability of Explanation 2 to Section 9(1)(vi) has been ruled out in respect of payments towards telephone bills, mobile phone bills and internet bills, Section 194J has no application.
Conclusion:
In our view, payments towards telephone bills, mobile bills and internet services, such payments cannot be considered as payment by way of Royalty and hence Section 194J in the context of Royalty has no application.
As such the provisions of section194J are not applicable to the payment made towards Internet, Mobile Phone Service etc.
This article is contributed by Partners ofSBS and Company LLP – Chartered Accountant CompanyYoucan be reached atThis email address is being protected from spambots. You need JavaScript enabled to view it.
