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TDS on internet connection

jyoti (ACCOUNTANT) (201 Points)

10 January 2011

do the TDS to be deducted on internet connection charges which is paid for quarterly basis? If yes, then what will be the section for deduction?

Very Urgent.....

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8 Replies

Devendra (Chartered Accountant) (4775 Points)
Replied 10 January 2011

TDS is not applicable on Internet Connection Charges as there is no contract between you and the Internet Service Provider.

Regards,

Devendra

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navinkumar naicker (Article) (419 Points)
Replied 10 January 2011

agree with Mr. devendra

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 10 January 2011

IN THE HIGH COURT OF DELHI

IT Appeal No. 527 of 2007

COMMISSIONER OF INCOME TAX

ESTEL COMMUNICATIONS (P) LTD

Shri Madan B Lokur & V B Gupta, JJ

Dated : March 7, 2008

Appellant Rep. by : Shri Ms P L Bansal
Respondent Rep. by : Shri R M Mehta

Income Tax - Assessee buys internet bandwidtth from an American company and sells the same to its customers in India - AO treats it as taxable u/s 9(1)(vii) and insists on TDS - Tribunal disagrees - Held, since the payment was made for a simple purchase of internet bandwidtth, no technical services were provided - Revenue's appeal dismissed

JUDGEMENT

The Revenue is aggrieved by the order dt. 8th Sept., 2007, passed by the Tribunal, Delhi Bench 'G', in ITA No. 4560/Del/2003 relevant for the asst. yr. 2001-02.

2. According to the assessee, it is providing internet access of a certain bandwidtth to its subscribers. The main server, on the basis of which the internet services are provided is located in USA. For the services rendered by the assessee to the subscribers in India, it levies a charge and out of this, some amount is paid to the US party, that is, M/s Teleglobe International Corporation (for short Teleglobe').

3. According to the AO. the assessee was liable to deduct tax at source from the payments made to the US party. For arriving at this conclusion, the AO invoked the provisions of s. 9(1)(i) and s. 9(1)(vii) of the IT Act, 1961.

4. Feeling aggrieved by the order passed by the AO, the assessee preferred an appeal which was allowed by the CIT(A). It was held that the assessee was merely providing internet services to its subscribers and, therefore, there was no question of deduction of tax at source in respect of payments made by the assessee to Teleglobe.

5. Against the order passed by the CIT(A), the Revenue preferred an appeal before the Tribunal and we find from a perusal of paragraph 10 thereof that the application of s. 9(1)(i) of the Act was not pressed by the Departmental Representative. The only question that arises, therefore, is about the applicability of the s. 9(1) (vii) of the Act.

6. Insofar as this is concerned, the Tribunal considered the agreement that had been entered into by the assessee with Teleglobe and came to the conclusion that there was no privity of contract between the customers of the assessee and Teleglobe. In fact, the assessee was merely paying for an internet bandwidtth to Teleglobe and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by Teleglobe to the assessee. It was a simple case of purchase of internet bandwidtth by the assessee from Teleglobe.

7. Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by Teleglobe to the assessee and, therefore, the provisions of s, 9(1)(vii) of the Act did not apply.

8. We find that the Tribunal has rightly dismissed the appeal after taking into consideration the agreement between the assessee and Teleglobe and the nature of services provided by Teleglobe to the assessee. It was a simple case of payment for the provision of a bandwidtth. No technical services were rendered by Teleglobe to the assessee.

9. On a consideration of the material on record, we find that no substantial question arises in the matter. The appeal is, accordingly dismissed.

Conclusion:

THE Delhi High Court has held that where the assessee used internet bandwidtth of a US company for providing internet access to its Indian subscribers, such transaction cannot be termed as technical services rendered by the US Company, liable to tax in India. The assessee was engaged in the business of providing internet access to its subscribers. The main server, on the basis of which internet services were provided, was in the US. Out of the service charges collected by the assessee from the subscriber, it paid an amount to the US Company. The assessing officer held that the services rendered by the US company were in the nature of technical services as per provisions of section 9(1)(vii) of the Act and therefore, the assessee was liable to deduct TDS on such payment. The High Court observed that there was no privity of contract between the customers and the US company. The assessee was merely paying for an internet bandwidtth to the US firm and then selling it to its customers. Hence, the assessee had only purchased internet bandwidtth. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by the US firm to the assessee. Therefore, it held that the payment was not subject to TDS

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 10 January 2011

IN THE ITAT MUMBAI BENCH ‘D’

Pacific Internet (India) (P.) Ltd.

Income-tax Officer - TDS, Ward 1(4), Mumbai

R.S. PADVEKAR, JUDICIAL MEMBER

AND REJENDRA SINGH, ACCOUNTANT MEMBER

IT APPEAL NOS. 1607 TO 1609 (MUM.) OF 2006

[ASSESSMENT YEARS 2003-04 TO 2005-06]

DECEMBER 23, 2008

Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fee for professional or technical services - Assessment years 2003-04 to 2005-06 - Assessee-company was engaged in business of providing internet access services to corporate clients and consumers - It availed bandwidtth and network operating infrastructure from VSNL/MTNL and other concerns and made huge payments in lieu of those services - Assessing Officer opined that in respect of said payments assessee should have deducted tax at source - Whether since bandwidtth and network operating facilities availed of by assessee were standard facilities and were not in nature of technical services within meaning of section 194J, read with Explanation 2 to clause (vii) of section 9(1), assessee would not be liable to deduct tax at source under section 194J in respect of payments-in-question - Held, yes