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Payments to a non-resident company for transmission of bulk SMS does not amount to Fees for Technical Service
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Payments to a non-resident company for transmission of bulk SMS does not amount to Fees for Technical Service

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Recently, the Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of the Velti India Pvt. Ltd. (the taxpayer) held that payment for bulk SMS to a non-resident carrier (i.e. …

Recently, the Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of the Velti India Pvt. Ltd. (the taxpayer) held that payment for bulk SMS to a non-resident carrier (i.e. a mobile communications company) does not amount to Fees for Technical Services since such services do not require any technical knowledge/skill. It does not have involvement of human intervention. Further, such services were rendered outside India and no part of the payment was chargeable to tax in India. Accordingly, the taxpayer is not required to withhold any tax while making such payments.

The Tribunal also held that service charges received in advance for the services to be rendered in future are not liable to tax in the year of receipt.

Published in: Education, Business, Technology

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  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Payments to a non-resident company for transmission of bulk SMS does not amount to Fees for Technical Service 21 April 2014 B Background Recently, the Chennai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of the Velti India Pvt. Ltd 1 (the taxpayer) held that payment for bulk SMS to a non-resident carrier (i.e. a mobile communications company) does not amount to Fees for Technical Services (FTS) since such services do not require any technical knowledge/skill. It does not have involvement of human intervention. Further, such services were rendered outside India and no part of the payment was chargeable to tax in India. Accordingly, the taxpayer is not required to withhold any tax while making such payments. The Tribunal also held that service charges received in advance for the services to be rendered in future are not liable to tax in the year of receipt. ________________ 1 DCIT v. Velti India Pvt. Ltd. (In ITA No.1030/Mds/2013) – Taxsutra.com Facts of the case Payments for bulk SMS does not amounts to FTS During the year under consideration, the taxpayer incurred carrier expenditure for transmission of bulk SMS and made payments to the telecom service providers namely, Clickatel, South Africa (Clickatel) being a non-resident and BSNL, India. The taxpayer contended that such services were not technical services, and hence not liable to Tax Deducted at Source (TDS). However, the Assessing Officer (AO) disallowed the deduction for such payments by invoking the provisions of Section 40(a)(i) of the Income Tax Act, 1961 (the Act). On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance made by the AO.
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Advance taxable on rendering of service The taxpayer received advance income from its customers and recognised the income in the subsequent year in which services were rendered. The AO held that there is no liability attached to the taxpayer in the event of failure to render the contracted services and therefore, assessed the advances as income in the year of receipt. However, the CIT(A) deleted the addition. Tribunal’s ruling Payments for bulk SMS does not constitute FTS Based on the observations of the CIT(A), the Tribunal held that the nature of services rendered by Clickatel is only to transmit bulk SMS which require no technical knowledge/skill. The Tribunal further observed that:  The carrier i.e., Clickatel is a medium for sending bulk SMS and as such cannot be considered to be rendering any technical services.  Based on the decision of the Supreme Court and the Delhi High Court in the case of Bharti Cellular Ltd. 2 , it was held that these services do not involve human intervention, and hence such services cannot be regarded as FTS.  The Tribunal also placed reliance on the decision of the Madras High Court in the case of Verizon Communications Ltd. 3 wherein it was held that collection of fees for usage of standard facility would not amount to payment made for providing technical services.  Clickatel, a non-resident carrier, rendered services outside India and no part of the payment to them is chargeable to tax in India. The Tribunal thus held that payment made by the taxpayer to Clickatel is not FTS and no tax withholding is required to be made on such payments. Advance received taxable in the year in which services were rendered The Tribunal upheld the following findings of the CIT(A):  The taxpayer maintains books on accrual system, hence income shall be recognised only when it accrues. ___________ 2 CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 (Del) 3 Verizon Communications Singapore Pte Ltd. v. ITO [2013] 39 taxmann.com 70 (Mad)  In the present case, the income accrues only when the taxpayer sends the required number of SMS. Only on completion of the service, the taxpayer has right over the amount that was received in advance. Therefore, the service charges received in advance for the service to be rendered in future years are not liable to tax in the year of receipt. Accordingly, the Tribunal held that the advance received is accrued as income on the completion of service by the taxpayer and not on receipt basis. Our comments This is a welcome ruling of the Tribunal wherein it has been held that providing services relating to bulk transmission of SMS to a non-resident mobile communication company, does not amount to FTS because such services do not require any technical knowledge/skill. The Tribunal also held that under the mercantile system of accounting, the income is accrued on rendering of service and not on advance receipt of amounts. It is important to note that the Tribunal has not dwelled into the meaning of ‘technical services’. However, the principle with respect to involvement of human intervention vis-a-vis FTS taxability has been reiterated by the Tribunal. The Bangalore Tribunal in the case of Clearwater Technology Services (P) Ltd 4 held that the payments to a foreign telecom company for voice charges were in the form of mere service charges, and since the services are not of managerial, technical or consultancy nature, it cannot be taxed as FTS. Similarly, in the case of Skycell Communications Ltd. 5 , the Madras High Court held that payment for mobile phone service is not FTS. __________________ 4 Clearwater Technology Services (P.) Ltd v. ITO [2012] 27 taxmann.com 238 (Bang) 5 Skycell Communications Ltd. v. DCIT [2001] 251 ITR 53 (Mad)
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010