TDS Deduction u/s 194J on Payments for Toll-Free Numbers: Considered as Royalty u/s 9(1)(vi) by Bombay High Court
Case Overview
The Bombay High Court has recently ruled that payments made for toll-free numbers are to be considered as royalty under Section 9(1)(vi) of the Income Tax Act, thereby requiring TDS deduction under Section 194J. Here’s a summary of the case details and the court's decision.
Background
- Assessee's Business: The assessee provides third-party administration services to insurance companies.
- Toll-Free Number Expenses: The assessee incurred expenses for toll-free telephone numbers, which are paid to telecom operators. The cost of calls made by customers to the toll-free number is borne by the assessee.
- Tax Filing: The assessee reported a loss of Rs. 4,49,76,074, including Rs. 58,80,650 as toll-free charges. The Assessing Officer (AO) claimed these expenses should be classified as royalty under Section 9(1)(vi) and that TDS under Section 194J should have been deducted. As a result, the AO disallowed the expenditure under Section 40(a)(ia) and Section 201.
The decision to classify toll-free number payments as royalty under Section 9(1)(vi) emphasizes the importance of understanding the broader definitions within the Income Tax Act.
Assessing Officer's Argument
- The AO argued that the toll-free number expenses are considered royalty under Section 9(1)(vi) since they involve a "process" for a communication link between customers and the assessee. This interpretation is supported by Explanation 2 and Explanation 6 (added retrospectively in 2012) to Section 9(1)(vi).
- Therefore, TDS should have been deducted under Section 194J when making these payments, and the failure to do so resulted in the disallowance of the expenditure under Section 40(a)(ia).
Assessee's Argument
- The assessee contended that the expenses do not constitute payment for professional services or royalty under Section 9(1)(vi). The definition of "process" was added retrospectively, and as established in the CIT v. Cello Plast case (2012), the principle of Lex non-cogit ad impossibilia (law does not compel a man to do what he cannot possibly perform) applies. Thus, the disallowance is legally unfounded.
Taxpayers must ensure compliance with TDS provisions under Section 194J to avoid disallowance of expenses under Section 40(a)(ia).
Court's Conclusion
The Bombay High Court sided with the Assessing Officer, stating that payments for toll-free numbers are indeed considered royalty under Section 9(1)(vi) since they involve a process for exclusive communication with customers. Explanation 2 to Section 9(1)(vi) includes "process" in the definition of royalty, and the retrospective amendment of Explanation 6 is merely clarifying.
As a result, TDS must be deducted under Section 194J for such payments. However, the court, following the precedent set by the Supreme Court in the Hindustan Coca-Cola Beverages case (2007), remanded the matter, stating that disallowance under Section 40(1)(ia) cannot be applied if the deductee has paid the taxes due. Only interest under Section 201(1) will apply.
Source: [2020] 116 taxmann.com 250 Vidal Health Insurance TPA (P) Ltd. v. Joint Commissioner of Income Tax, (OSD) Bangalore
Frequently Asked Questions (FAQs)
What is Section 9(1)(vi) of the Income Tax Act?
Section 9(1)(vi) of the Income Tax Act defines the income deemed to accrue or arise in India, specifically focusing on income by way of royalty. It includes payments for the use of or the right to use various forms of intellectual property and processes.
What does Explanation 2 to Section 9(1)(vi) cover?
Explanation 2 to Section 9(1)(vi) clarifies the definition of 'royalty' to include payments for the transfer of all or any rights in respect of any patent, invention, model, design, secret formula, or process, etc.
Why was the assessee's expenditure disallowed?
The expenditure was disallowed because the Assessing Officer classified the toll-free number payments as royalty, requiring TDS deduction under Section 194J, which was not done. Hence, the expenses were disallowed under Section 40(a)(ia).
What was the court's final decision?
The Bombay High Court ruled that the toll-free number payments are considered royalty, and TDS should be deducted under Section 194J. However, the case was remanded, and the disallowance under Section 40(1)(ia) was not sustained if the deductee had paid the taxes due, only interest under Section 201(1) applied.
Important Dates
| Event | Date |
|---|---|
| Bombay High Court Judgment | May 9, 2020 |