The Income Tax Appellate Tribunal (ITAT), Pune Bench quashed the order confirming disallowance of leased line charges on account of non-deduction of tax at source.
The assessee, M/s. Barclays Technology Centre India Pvt. Ltd. is an Indian Private limited company engaged in providing Software Solution services to Barclays group worldwide.
It has one undertaking approved as a 100% Export Oriented unit eligible for deduction under section 10B of the Income-tax Act, 1961, another unit within the area of Special Economic Zone (SEZ) entitled to deduction under section 10AA of the Act and still another unit in Domestic Tariff Area (DTA) in Mumbai.
During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee paid a sum of Rs.2,41,82,749 as leased line charges to various vendors in India, which were claimed as deduction.
On being called upon to explain as to why no deduction of tax at source was made in terms of section 194J of the Act, it was submitted that the amount paid was not in the nature of fees for Professional or technical services or royalty etc. in the hands of recipient warranting any deduction of tax at source.
The issue raised in this case was whether the assessee was liable to deduct tax at source on the amount of leased line charges paid by it to various vendors in India so as to warrant disallowance under section 40(a)(ia) of the Act.
The assessee is an Indian company and it made payment of leased line charges to various vendors in India. In view of the fact that a resident paid leased line charges to another resident, the matter ends by examining the ambit of the term “Royalty” under the Act itself and there is no need to examine various DTAAs which have been looked into by the Tribunal in certain decisions for holding that leased line charges are not `royalty’ in the light of the definition of the term “Royalty” as used in the respective DTAAs.
The next point requiring consideration is as to whether the assessee could have legally deducted tax at source from the payments made during the Financial Year 2011-12.
The coram of S.S.Visvanethra Ravi and R.S.Syal, while allowing the assessee’s appeal held that even though the amount became chargeable to tax as royalty in the hands of the recipient under the Act for the year under consideration but the same did not fasten an obligation to deduct tax at source as the assessee could not have activated its sixth sense to ascertain beforehand that an obligation to deduct tax at source was in offing. As the scope of “Royalty” came to be expanded after the close of the financial year when the assessee had already paid lease line charges.
The ITAT held that the same could not have triggered deduction of tax at source so as to warrant any disallowance under section 40(a)(ia) of the Act.
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