S. 194J Wheeling charges paid for electricity transportation not liable to TDS

Brief of the Case

Delhi High Court held In the case of CIT vs. M/s Delhi Transco Ltd. that as per BPTA agreement between DTL and PGCIL there is transportation of the electricity from PGCIL to DTL, through the equipment and network required statutorily to be maintained by PGCIL through its technical personnel using technical expertise. This, however, does not result in PGCIL providing technical services to DTL. Therefore the wheeling charges paid by DTL to PGCIL for such transportation of electricity cannot be characterized as fee for technical service.

Facts of the Case

The Assessee Delhi Transco Ltd. (DTL) entered into Bulk Power Transmission Agreement (BPTA) on 21st July 2004 with the Power Grid Corporation India Ltd. (PGCIL). In one of the preamble clauses of the BPTA, it was recorded that DTL is desirous of receiving energy through power grid transmission system on mutually agreed terms and conditions. The BPTA defined several terms including the term wheeling. Under Clause 8 of the BPTA, it was agreed that the transmission charges would be paid to PGCIL by DTL for transmitting private sector power through PGCIL lines as per the guidelines of the Central Electricity Regulatory Commission (CERC). Clause 10 stated that the transmission tariff and terms and conditions for the power to be transferred by PGCIL would be in terms of the notification to be issued by CERC from time to time. On the commissioning of the new transmission system DTL was to pay the provisional transmission tariff in line with the tariff norms issued by CERC. The tariff was subject to adjustment in terms of CERC notification. The wheeling for the transmission power was to be in terms of the CERC guidelines..

A survey was carried out in the business premises of DTL under Section 133A on 22nd January 2009. It was noticed that DTL had deducted tax at source (TDS) at 2% under Section 194C on the wheeling charges paid to PGCIL. The statement of one Mr. Surendra Babbar, Deputy General Manager (Finance) of DTL was recorded. Following the survey, DTL wrote a letter dated 29th January 2009 protesting that the survey was without jurisdiction as it could only have been carried out by ACIT Circle 10 (1), New Delhi. A show cause notice was issued to DTL on 20th February 2009. DTL filed a reply on 26th February 2009. After, considering the response to the show cause notice and after hearing the various representatives of the DTL, the AO passed an order dated 27th March 2009, under Sections 201 (1)/201 (1A). The AO held that wheeling charges paid by DTL were fees for technical services liable for TDS under Section 194J.

Contention of the Assessee

 The ld counsel of the assessee submitted that in the decision dated 8th May 2015 of the Division Bench of the Bombay High Court in CIT v. Maharashtra State Electricity Distribution Co. Ltd. [2015] 375 ITR 23 (Bom) which held that wheeling charges would not amount to payment of fees for technical services.

He referred to the definition of wheeling contained in the BPTA. He reiterated that the Assessee was only paying for the electricity transmitted to it through the equipment and lines maintained by PGCIL. Whatever services the technical personnel of PGCIL were performing was for the benefit of PGCIL itself. PGCIL was acting like a transporter of electricity through its equipments and the charges for that were being paid by the Assessee in terms of the tariff determined by the CERC. In the circumstances, it was essentially a payment for transportation of the electricity and nothing more.

He also referred to the decision dated 12th June 2015of the ITAT in Jaipur in Bharti Hexacom Ltd. v. Income Tax Officer (TDS) II (ITA No. 656/JP/2010), which was rendered after the decision of this Court in CIT v. Bharti Cellular [2009] 319 ITR 139 was set aside by the Supreme Court in CIT v. Bharti Cellular Ltd. [2011] 330 ITR 239, and the matter was remanded to the AO with directions to examine technical experts. He also referred to the dictionary meaning of the word services. Ms. Rashmi Chopra, learned counsel supplemented the above submissions and referred to the decision in Union of India v. Martin Lottery Agencies (2009) 12 SCC 209.

Contention of the Revenue

The ld counsel of the revenue submitted that whether the fees paid in the context of rendering of services amounted to fees for technical service could be answered only by examining the very nature of service being performed, and in that context the working of the industry, in this case, the power generation and transmission industry. According to him, a detailed analysis would have to be undertaken by examining experts and since that was not performed by the ITAT or perhaps even the AO, the case would have to be remanded for a fresh determination.

On the other hand, it was submitted that the test adopted by the ITAT was plainly erroneous. The question was not only about whether there was any human intervention in rendering of the services, but whether without technical support or technical inputs it would at all be possible to avail of the services. He submitted with reference to the aforementioned regulations that there was a statutory requirement of the power generation company and the power transmission company to maintain their equipments in conformity with certain minimum standards. This required considerable technical knowledge and skill. He referred to the decision of this Court in DIT vs. Lufthansa Cargo India (2015) 375 ITR 85 (Del) and submitted that the observations therein helped the Revenue in so far as it was claimed that without technical inputs the question of availing the services of the kind contemplated in the present case was not possible. He urged that the matter should be remanded to the AO for carrying out a detailed enquiry. Reliance was also placed by Mr. Sawhney on certain observations made by this Court in DIT(International Taxation)v. Panalfa Autoelecktrik Ltd. (2014) 272 CTR 117(Del).

Held by CIT (A)

The CIT (A) dismissed the appeal of the assessee. It was held that Section 194C of the Act would apply since electricity was goods as defined under Section 2 of the Sales of Goods Act and in terms of the contract; PGCIL was in fact transporting such goods to DTL. The CIT (A), however, held that in the absence of sufficient legal precedent on the subject, I am unable to reject the view taken by Ld. Assessing Officer. The CIT (A), therefore, confirmed the said order of the AO. Some relief was granted as far as the calculation of interest payable.

 Held by ITAT

The ITAT agreed with the DTL that what had been availed by it from PGCIL was not a technical service. It was held that DTL was not liable to be saddled with higher liability of TDS. The appeal was accordingly allowed.

The ITAT based its opinion on the decision of this Court in CIT v. Bharti Cellular Ltd. (2008) 220 CTR (Del) 258 and of the Madras High Court in Skycell Communications Ltd. v. DCIT (2001) 251 ITR 53 (Mad). The ITAT noted that both the decisions laid emphasis on the involvement of a ‘human element’ for rendering technical services and imparting of technical knowledge. The ITAT held that none of those conditions were satisfied in the present case. While there might be supervision of transmission work by the technical personnel of the payee there is no human intervention in so far as the assessee is concerned regarding the transmission. It was further held that even if technical knowledge could be upgraded without presence of human beings by way of handing over drawings and designs or a technical service can be rendered by robot (machines) without intervention of human element, the classification of the services rendered by the assessee as technical service is not free from doubt.

Held by High Court

Whether ‘wheeling’ of electricity is a rendering of service by PGCIL to DTL?

 In the decision of the ITAT Jaipur in Bharti Hexacom Ltd. (ITA No. 656/JP/2010), it is apparent that after the exercise of examination of experts was completed, and the AO gave his decision, the ITAT came to the conclusion that while for installation, setting-up, repairing, servicing, maintenance and capacity augmentation, human intervention might be required but “after completing this process mere interconnection between the operators is automatic and does not require any human intervention”. Consequently, interconnect user charges received or paid were held not to be fees for technical services within the meaning of Section 194J read with Section 9 (1) (vii) read with Explanation 2 of the Act.

In Skycell Communications (2001) 251 ITR 53 (Mad), the Madras High Court went into the dictionary meaning of the word „technical‟ and then concluded that the expression “fee for technical services could only be meant to cover such things technical as are capable of being provided by way of service for a fee”. But it is not in every case that the provision of service might involve the element of human intervention.

In Panalfa Autoelecktrik (2014) 272 CTR 117(Del), this Court observed that technical services consist of services of technical nature “when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so”. It was held that technical, managerial and consultancy services might overlap and it would not be proper to view them in watertight compartments. In that case it was held that the commission paid by the Assessee to its foreign agent for arranging export sales and recovery of payment could not be regarded as fee for technical services.

In Lufthansa Cargo India (2015) 375 ITR 85 (Del the Court was addressing the question whether the fee paid to the non-resident company outside India by the Assessee for carrying out maintenance, repairs to run the leased aircraft flying hours and for component overhaul and maintenance was “fee for technical services”. Answering the question in affirmative, the Court opined that unlike normal machinery repair, the aircraft maintenance and repairs, and their component overhaul maintenance would require specific level of technical expertise. The exclusive nature of these services could not but lead to the inference that they are technical services.

In Union of India v. Martin Lottery Agencies (2009) 12 SCC 209, the Supreme Court considered the meaning of word “service‟, and whether it would include promoting and organizing a lottery. It was held that dealing with lottery was res extra commercium, and therefore it could not amount to rendition of any service.

The Bombay High court in the Maharashtra State Electricity [2015] 375 ITR 23 (Bom) considered, inter alia, whether wheeling charges could be characterized as fee for technical services. It was acknowledged that as a transmission licensee the state undertaking, MSEDCL, could engage in wheeling operations as defined under Section 2(76) meaning thereby that the distribution system. The facilities of MSEDCL, in its capacity as transmission licensee, were permitted to be used by other persons for conveyance of electricity upon payment of charges to be determined under Section 62 of the EA. The Bombay High Court concluded that ‘wheeling charge’ would neither be rent nor fees for technical services. They represented the charge for permitting use of the STU by persons other than the distribution license. The transmission charges simply constitute fees for availing of the said transmission utility to be used by open access concept for distribution of electricity to licensees and consumers.

In light of the above decisions, it is clear that what constitutes technical services cannot be understood in a rigid formulaic manner. It will vary from industry to industry. There will have to be a specific line of enquiry for determining what in a particular industry would constitute rendering of a technical service.

It is apparent from the above questions and answers that despite a leading suggestion put to Mr. Rajagopalan that the transmission of electricity was a technical service, his answer was to the effect that the technical service provided was not to the purchaser of electricity but in operating and maintaining the various equipments and transmission of lines.

This was an important input for understanding the nature of the service that is provided. The plea of DTL that the BPTA between it and PGCIL was essentially for transporting electricity from one point to another and that this is automatic through the network or equipments without any human intervention appears to be correct. The system operated by PGCIL and used for transmission of electricity is no doubt maintained by skilled technical personnel professional. This also ensures that PGCIL complies with the standards and norms put in place by the statutory regulations. However, the beneficiary of such services is PGCIL itself. PGCIL is operating and maintaining its own system using the service of engineers and qualified technicians. PGCIL is in that process not providing technical services to others, including DTL.

Although the wheeling charges may be fixed by the CERC, that by itself is not a determinative factor. In the present case, DTL is seeking to characterize the wheeling charges as payment for use of PGCIL’s equipment within the meaning of Section 194C of the Act. Interestingly, the CIT (A) in its order has accepted the plea that the job of DTL is to transport the electricity and it is therefore like carriage of goods. Despite accepting the above plea, the CIT (A) has simply concurred with the AO only because of “absence of sufficient legal precedent on the subject”. Once it is accepted that all what PGCIL does is to transmit the electricity to DTL through the network without any human intervention, it cannot be characterized as a provision of technical services and sought to be brought within the fold of Section 194J.

.Accordingly, appeal of the revenue dismissed..