ACIT CIRCLE 25(1), NEW DELHI vs. VERIZON COMMUNICATIONS INDIA PVT LTD., NEW DELHI

In appeal, before CIT(A), the assessee has submitted that its case is squarely covered by the decision of the Hon’ble ITAT Delhi Bench passed in its own case for the AYrs. 2010-11 to 2015-16. The appellant has contended that ruling of Hon’ble Delhi High Court and Hon’ble Delhi Tribunal are binding on lower authorities and the AO should have considered the decisions rendered by the Jurisdictional Court, rather than referring to the decision of the Hon’ble Madras High Court in the case of Verizon Communication Singapore Pvt. Ltd (supra), facts of which are not applicable to the assessee’s case. The appellant had stressed that payment for Telecommunication Service made to MCICS and MCII do not qualify as Royalty and to support its case, the appellant had placed reliance upon various judicial precedents. Further by placing reliance upon various judicial precedents, the appellant has further submitted that retrospective amendment made in the definition of 'Royalty' under the Act by Finance Act 2012 by way of insertion of Explanation 5 and 6 to section 9(1)(vi) of the Act has no applicability on the payments made by the Appellant as any 3 amendment made in the Act cannot amend the provisions of tax treaties. The appellant had stressed that its case is covered by exception given in section 9(1)(vi)(b) of the Act and prayed that the addition made by the AO at Rs. 30,48,02,303/- on account of disallowance u/s. 40(a)(i) of the Act by holding payments made by the assessee to MCICS and MCII as ‘Royalty’ under section 9(1)(vi) of the Act may kindly be deleted.

The CIT(A) sustained the contentions of assessee by following findings; “Considering the facts of the case and appellant’s submissions, I am inclined to agree with the appellant’s claim. I find that the issue “whether payments made by the assessee to MCICS and MCII are in nature of ’Royalty’ which attracted provisions of section 195” is considered by the Hon’ble ITAT Delhi Bench ‘D’ in appellant’s own case for the AY 2011- 12 and decided in favour of the assessee by holding that these payments are not in the nature of ’Royalty’ and hence, the assessee is not liable to deduct TDS as per provisions of section 195 of the Act on these payments. Accordingly, the Hon’ble Delhi ITAT directed to delete the disallowance made u/s. 40(a)(i) of the Act. Subsequently, similar issue further came up for adjudication before the Hon’ble Delhi ITAT ‘D’ Bench in appellant’s own case for AYrs. 2013-14, 2015-16 & 2010-11. The Hon’ble ITAT Delhi ‘D’ Bench vide their common order dated 20-10-2021 in 6509/Del/2019 & 2234/2019 decided the issue in favour of the assessee following the earlier decision of coordinate Bench passed for the AY 2011-12. 5.1 As with regard to payment amounting to Rs.104,25,78,180/- to Verizon Business Network Service Ind. (fellow subsidiary) which assessee had claimed as payment being made for business support service. The CIT(A) had held as follows; “9. I have considered the facts of the case, assessment order and appellant’s written submissions. The AO noted that the assessee company made payment amounting to Rs.104,25,78,180/- to Verizon Business Network Service Ind. (fellow subsidiary) and claimed the 4 said payment being made for business support service. The AO was of the view that these payments are similar to payments made to MCI Communication Service in earlier years for which disallowances were made u/s. 40(a)(i) of the Act in those years. Accordingly, the AO made the disallowance of Rs.104,25,78,180/- u/s 40(a)(i) of the Act for not withholding taxes. The appellant has contended that the AO misunderstood the facts/ nature of the services provided by VBNSI to the Appellant and he grossly erred in characterizing the payments made to VBNSI for the Business Support Services as "Telecom Charges" of the nature provided by MCICS and MCII to the Appellant. The appellant has submitted that the Business Support Services provided by VBNSI are different from the Telecommunication Services provided by MCICS and MCII to the Appellant. To support its case, the appellant elaborately discussed relevant Articles of India- US treaty and stated that payments for business and operational support service to VBSNI do not qualify as FTS in terms of section 9(l)(vii) r.w Article 12(4) of the India-US tax treaty. The appellant has also referred to various judicial precedents. Alternatively, the appellant has submitted that if the AO’s assertion is taken to its logical conclusion, the said services get squarely covered by the order of the Hon’ble Delhi Tribunal in Appellant's own case for AY 2010- 11, 2011-12, 2013- 14 and AY 2015-16 wherein the Hon'ble Delhi Tribunal held that these payments are not in the nature of 'Royalty'. Considering the facts of the case and appellant’s submissions, I am inclined to agree with the appellant’s claim. In the instant case, while making the addition of Rs.1,04,25,78,180/- on account of disallowance u/s. 40(a)(i) by holding payment made by the assessee to VBSNI as ‘Royalty’ under section 9(1)(vi) of the Act, the AO simply stated that similar payments were made by the assessee company to MCI Communication Service in earlier years and disallowances u/s 40(a)(i) of the Act were made. When the AO himself equated the payments made to VBSNI as similar to payments made to MCI Communication Service which were considered as ‘Royalty’ and held as liable for deduction of tax as per provisions of sec. 195 of the Act, then certainly this issue gets covered by the decision of the Hon’ble ITAT Delhi ‘D’ Bench in appellant’s own case for the AYrs. 2010-11 to 2015-16 wherein the Hon’ble ITAT Delhi ‘D’ Bench clearly held that such payments do not fall within the ambit of royalty, within the relevant Article of DTAA and the assessee company is not required to deduct TDS on such payments. Findings of the Hon’ble ITAT in this regard have already been reproduced in para no. 6 above. Respectfully following the above decision of the Hon'ble Delhi ITAT ‘D’ Bench as reproduced above in para 6 above, it is held that the AO 5 was not justified in making addition of Rs. 1,04,25,78,180/- on account of disallowance u/s. 40(a)(i) of the Act by holding payments made by the assessee to VBSNI as ‘Royalty’ under section 9(1)(vi) of the Act, the AO is directed to delete the same. The grounds of appeal raised by the appellant regarding this issue are allowed.”