A recent ruling of the Supreme Court (SC) in a batch of cases, with the lead case being that of Bharti Cellular Ltd. (Taxpayer), on whether any manual intervention is involved in the technical operations by which a cellular service provider, such as the Taxpayer, is given facility for interconnection.
If manual intervention is involved, the payments for such facility would be considered as ‘fees for technical services’ (FTS) under the Indian Tax Laws (ITL) and the Taxpayer would be required to withhold taxes. In this context, one may recall that the Delhi High Court (HC) [319 ITR 139] had earlier held that as these services do not involve any human interface, these cannot be regarded as FTS as contemplated under the ITL.
The SC referred the matter back to the Tax Authority for adjudication by taking into account an expert’s opinion on whether any human intervention is actually involved in such transactions. Till such time, the Tax Authority was directed not to levy interest or penalty for not withholding taxes as the matter of tax ability of such payments is pending adjudication.
Background and facts
- The Taxpayer, engaged in the business of providing cellular/ telephone facilities, obtained licenses for operating in its specified circles.
- In case of calls made by subscribers of one network to another network i.e., subscribers which fall outside the specified circle of the Taxpayer, these are necessarily to be routed through national long distance telecommunication carriers viz., MTNL and BSNL, which provide interconnection between the two networks.
- Therefore, as per the prevailing guidelines, the Taxpayer is required to connect its network with that of BSNL and a similar concomitant agreement is entered into under which BSNL is required to interconnect its network with that of the Taxpayer. For such interconnection/port access, payments are made by the Taxpayer.
- Under the provisions of the ITL, the term FTS is defined to mean any consideration for the rendering of any managerial, technical or consultancy services. Where a payment qualifies as FTS, it is subject to withholding tax even when the recipient is a resident of India, under the ITL.
- The issue under consideration was whether payments made by the Taxpayer to BSNL/ MTNL for availing the interconnection/ port access services should be subject to withholding tax as FTS.
- The HC (supra) had decided the issue in favor of the Taxpayer on the basis that these services do not involve any human interface. The HC agreed with the Taxpayer that the term ‘technical’ needs to be interpreted in light of the words ‘managerial’ and ‘consultancy’, between which it is sandwiched in the definition of ‘FTS’ under the ITL. An element of human intervention is essential for providing managerial and consultancy services and, consequently, by applying a similar analogy, the term ‘technical’ would also have to be construed as involving a human element.
The SC ruling
- The expression ‘technical services’ comes in between the words ‘managerial’ and ‘consultancy’ services in the ITL. Various decisions of the High Courts and Tribunals have taken a view that the expression ‘technical services’ has to be read in the narrower sense by following the rule of Noscitur a sociis i.e., questionable meaning of a word can be derived from its association with other words.
- There is, however, no expert evidence from the Tax Authority’s side to show how human intervention takes place in the present fact pattern. Expert evidence is required to decide whether there is any manual intervention involved during the traffic of such calls. In a situation where the taxpayer is allotted a fixed capacity and in case this capacity is exhausted, it is unclear whether any human involvement is required in allocating additional capacity on an urgent basis. Thus, whether at any stage, any human intervention is involved needs to be examined based on the technical evidence from technical experts. This would enable appellate authorities to decide the legal issue based on factual foundation.
- Therefore, keeping in mind the larger interest and the ramification of the issue, the matter was remitted to the Tax Authority to decide the issue after examining technical experts within a period of four months. Such experts would be cross-examined. The taxpayers are also at liberty to examine the experts and adduce any other evidence. Till such time, the tax administrative authority was asked to issue directions to all its officers that in such cases, the Tax Authority would not proceed against other taxpayers only on the basis of agreements placed before them. Once the issue is settled, the Tax Authority would be able to levy both interest and penalty on such transactions based on the outcome of the issue.
- However, interest or penalty cannot be levied on the Taxpayer and other parties to this case for the following reasons:
– There is no loss of revenue to the Tax Authority for not withholding taxes on such payments as taxes have already been paid by the recipient.
– The question of tax ability of the payments as FTS is still not determined. Therefore, there would be no levy of penal interest prior to the date of fresh adjudication order.
Comments
Characterization of payments for various types of technology-related transactions has been a subject matter of controversy in India in recent times. In this context, the decision of the HC provides guidance on application of the definition to such transactions and advocates construction of the term ‘technical services’ in the narrower sense to mean only technical services rendered by a human. Specifically, it does not include any service provided by machines or robots. By remitting the matter to the Tax Authority to determine, after examining technical experts, whether an element of human intervention was involved, the SC appears to have accepted the view that human intervention is necessary for a technical service to qualify as FTS.
This interpretation should be of relevance for cross-border technology-related payments as well as for determining applicability of withholding tax on cross-border service fee payments. In addition, a number of India’s tax treaties also use a similar definition for FTS.
Furthermore, the SC has stressed upon the fact that mere consideration of the agreement to ascertain tax ability or otherwise of a payment under the ITL is not the right way to adjudicate on the matter. Technical or expert opinion will also have to be considered especially keeping in mind the larger interest and ramification of the issues.
