M/S. HITACHI METGLAS (INDIA) PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

The present appeal has been filed by the assessee against the order of the ld. CIT(A)-16, New Delhi dated 15.03.2016.

The assessee company is engaged in the business of designing and manufacturing of cores and other amorphous metal or nanocrystaline soft magnetic metal used in transmission and distribution equipment and in electronic and computer products and other related products.

The assessee filed return of income on 29.11.2011 declaring income of Rs.17,48,94,464/-. During the year under consideration, the assessee has undertaken international transaction with its Associated Enterprises (AE) and the matter was referred to the TPO in accordance with the Section 92CA of 3 Hitachi Metglas ((India) Pvt. Ltd. the Income Tax Act, 1961. The TPO passed an order u/s 92CA(3) of the Act dated 25.08.2014 in which no adjustments have been made with regard to the international transaction.

During the year, the assessee company paid for support & analysis system provided by three A.E.s namely M/s Metglass INC USA, Hitachi Asia Ltd. Singapore and Hitachi Ltd. Japan. With this support system & analysis, the assessee company is producing certain articles or things in India & therefore the Assessing Officer held that the income is clearly arising or accruing & also deemed to be accruing in India u/s 9(1) of the I.T. Act.

The AO held with regard to the fee for technical services used in India, it can be said that the services rendered are such which require expertise and knowledge in the specific area of work and such expertise cannot be developed overnight but is the result of long period of work in this line of activities coupled with accumulated experience of operations. Hence, the payments made by the taxpayer to the AEs namely, Metglass INC USA, Hitachi Asia Ltd. Singapore and Hitachi Ltd. Japan partakes the character of FTS under the domestic law.

In view of the above, the Assessing officer held that assessee was liable to deduct TDS on Admin and Network Support service charges of Rs.35,60,212/- paid by Hitachi Metglass India Pvt. Ltd. to Metglass INC USA, Hitachi Asia Ltd. Singapore and Hitachi Ltd. Japan. Since the assessee did not deduct TDS as per provisions of the section 195 of the Act; therefore total deduction of expenditure of Rs.53,76,510/- on Admin and Network Support service charges as claimed by the 4 Hitachi Metglas ((India) Pvt. Ltd. assessee was disallowed and added back to the total income the assessee.

The ld. CIT(A) confirmed the action of the AO referring to the Section 4, Section 5 and Section 8 of the agreement between the assessee and the Hitachi Asia Ltd. and Hitachi Ltd. and holding that “human intervention” is in fact an integral part of the service agreement.

Before us, the ld. AR argued that the services cannot be treated as “Fee for Technical Services” as the amounts have been paid for link charges for mail and internet services which do not need in “human intervention”. He argued that the services are seamless and the transmission is automatic in nature.

On the other hand, the ld. DR argued that “human intervention” is a part of service agreement and the AE also provides for certain service personnel. Hence, the services availed should be treated as “Fee for Technical Services” u/s 9(1)(vii).

Heard the arguments of both the parties and perused the material available on record.

The Sections referred by the ld. CIT(A) pertaining to the Master Service agreement between the assessee and Hitachi Ltd. are as under:

Further, we have gone through the Section 1 pertaining to Scope of Work (SOW) as mentioned in para 1.1 of the said agreement. The SOW deals with providing Global Wan which is a broadband network that spans the entire Hitachi Group and a corporate platform that encompasses WAN networks varying in their modes of implementation. The global WAN is able to provide Hitachi Group Companies with the services like two-way connectivity between locations/grouped firms- builds secure

We find that the services provided by the non-resident AEs to the Assessee are standard automated services. These services, as specified above, are provided to enable the assessee to send and receive data through the broadband network over the intranet and internet. All companies of the Hitachi group are provided with network services to exchange information through intranet and regulate use of internet through its proxy servers or provide remote access to log on to the company’s network. It is a settled law that standard/ common services cannot partake the character of FTS under the IT Act.

The Hon’ble Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT 251 ITR 53 held that call charges received from telecom operators from firms and companies subscribing to cellular mobile services provided by them do not come within the definition of technical services under section 194J read with section 9(1)(vii) Explanation 2 as 9 Hitachi Metglas ((India) Pvt. Ltd. it a mere collection of fee for use of standard facility provided to all those willing to pay for it.

Reliance in this regard is placed on the ruling of the Hon’ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. [2016] 383 ITR 1 (SC) wherein it was held that common or standard services provided to every member who wants to trade on the stock exchange cannot be termed as fee for technical service under Explanation 2 to section 9(1)(vii) of the IT Act(para 9).

In the ruling of CIT vs. Media World Wide (P.) Ltd. 120 taxmann.com 423, the Hon’ble Calcutta High Court observed that mere collection of a 'fee' for use of a standard facility which is available to everybody against payment of a fee, does not amount to the provider of the facility receiving fee for technical services.

In the ruling of CIT vs. ESTEL Communication (P.) Ltd. 318 ITR 185, Hon’ble Delhi High Court held that the taxpayer in that case was merely paying for an internet bandwidth to the deductee and then selling it to its customers. It observed that the use of internet facility may require sophisticated equipment but that does not mean that technical services were being rendered by the deductee to the taxpayer in that case. It was a simple case of purchase of internet bandwidth by the taxpayer from the deductee. The High Court held that the provisions of Section 9(1)(vii) of the IT Act did not apply.

The invoices raised by Hitachi Limited, Japan and Hitachi Asia Limited, Singapore to the Assessee in lieu of the services

Hence, the services received by the assessee can be said to be not in the nature of FTS as defined under Explanation 2 to Section 9(1)(vii) of the IT Act. To treat any consideration as FTS, such consideration must be paid for rendering of managerial, technical or consultancy services.

The revenue failed to consider the fact that the IT support services availed by the Assessee did not involve any human intervention. The Ld. CIT (A) reproduced extracts of the Master Service Agreement between the Assessee and Hitachi Asia Limited, Singapore and observed that human intervention is an integral part of the Master Service Agreement which is completely misconceived. In fact, no reasons were provided by the Ld. CIT (A) as to how human intervention was an integral part of the Master Service Agreement.

The extracts of the agreement relied upon by the Ld. CIT(A) do not indicate that the IT support services were provided through human intervention. By their very nature and inherent characteristics, networking services over internet and intranet including mail services cannot be provided by human activities and intervention. Sections 4 – 8 of the services agreement extracted by the Ld. CIT(A) in his order does not demonstrate or show in any manner that human intervention was required for rendering the IT support services. The 11 Hitachi Metglas ((India) Pvt. Ltd. obligation to share information, confidentiality and other obligations are standard obligations that are provided in any services agreement and do not deal with the manner of provisioning of services but with ancillary obligations of the parties. There is no human intervention in the supply of services.

The Hon’ble Delhi High Court in CIT vs. Bharti Cellular Ltd. 319 ITR 139 has held that the word "technical" as appearing in Explanation 2 to section 9(1)(vii) of the Act is preceded by the word "managerial" and succeeded by the word "consultancy" and the same takes colour from the word "managerial and consultancy". The Court held that in such a case principle of noscitur a sociis gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services must be given by human only and not by any means or equipment. Therefore, the word "technical" must be construed in the same sense involving direct human involvement, and without that, the services provided cannot be held to be technical services under Explanation 2 to Section 9 (1) (vii) of the IT Act. Following the ratio laid down in Bharti Cellular (supra), various co-ordinate Benches of the Tribunal have held that to treat any payment as FTS, element of human involvement is mandatory:

We have also gone through the ratio laid down by the Hon’ble apex court in the issue in the following cases.

Thus we conclude that the foreign AE (service provider) has neither employed any technical or skilled person to provide managerial or technical service nor there was direct interaction between the assessee and the foreign AE. Thus, where the entire process resulting in provisioning of service is fully automated process with no human intervention, charges paid for provision of such services cannot be classified as FTS for the purpose of the IT Act.

In view of the foregoing submissions, it is held that the IT support services availed by the Assessee from Hitachi Ltd., Japan, and Hitachi Asia Ltd., Singapore are standard connectivity and networking services cannot be termed as technical services within the meaning of Section 9(1)(vii) of the Act. Hence, we hold that the assessee was not liable to deduct TDS on such expenditures. Accordingly, the disallowance made by the AO and confirmed by the Ld. CIT (A) in the present case is liable to be deleted.

In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 13/10/2021.