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Payment for telecom towers and network infrastructure services constitutes ‘rent’ for the use of machinery, plant or equipment, which attracts withholding of tax at the rate of 2 per cent
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Payment for telecom towers and network infrastructure services constitutes ‘rent’ for the use of machinery, plant or equipment, which attracts withholding of tax at the rate of 2 per cent

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Recently, the Delhi High Court in the case of Indus Towers Ltd, dealt with an issue of whether the payment for telecom towers and network infrastructure services is to be treated as rent for premises …

Recently, the Delhi High Court in the case of Indus Towers Ltd, dealt with an issue of whether the payment for telecom towers and network infrastructure services is to be treated as rent for premises and taxable at the rate of 10 per cent, or whether it is to be treated as rent for the use of the machinery, plant or equipment and liable for deduction of tax at 2 per cent. Alternatively, the transaction is covered under Section 194C of the Income-tax Act, 1961 as a contract payment. The High Court held that payment for telecom towers and network infrastructure services constitutes ‘rent’ for the use of machinery, plant or equipment which attracts withholding of tax at two per cent. The dominant intention of the transaction was the use of the equipment or plant or machinery and not the use of the premises which was incidental to such services.

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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 Payment for telecom towers and network infrastructure services constitutes ‘rent’ for the use of machinery, plant or equipment, which attracts withholding of tax at the rate of 2 per cent 11 April 2014 B Background Recently, the Delhi High Court in the case of Indus Towers Ltd 1 (the taxpayer), dealt with an issue of whether the payment for telecom towers and network infrastructure services is to be treated as rent for premises and taxable at the rate of 10 per cent, or whether it is to be treated as rent for the use of the machinery, plant or equipment and liable for deduction of tax at 2 per cent. Alternatively, the transaction is covered under Section 194C of the Income-tax Act, 1961 (the Act) as a contract payment. The High Court held that payment for telecom towers and network infrastructure services constitutes ‘rent’ for the use of machinery, plant or equipment which attracts withholding of tax at two per cent. The dominant intention of the transaction was the use of the equipment or plant or machinery and not the use of the premises which was incidental to such services. ________________ 1 Indus Towers Ltd. v. CIT & Ors [W.P.(C) 6085/2013] – Taxsutra.com Facts of the case  The taxpayer owns a countrywide network of telecom towers and network infrastructure services. The taxpayer provides passive infrastructure services to its customers, i.e. telecom service providers.  As per the master service agreement, entered with its customers, the taxpayer was to not let out or rent the tower or facilities, but to extend and provide highly specialised technical services.  During the year under consideration, the taxpayer applied for lower deduction certificate on the projected receipts under Section 194C the Act. However, the Assessing Officer (AO) issued a lower withholding certificate treating the receipts under Section 194-I, based on the average rates of tax to turnover for the last three years.
  • 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.  Aggrieved by the AO’s order, the taxpayer filed a writ petition before the High Court. However, the High Court directed the taxpayer to prefer a revision petition before the Commissioner of Income tax (CIT). On revision petition, the CIT held that the consideration received by the taxpayer from the mobile operator constitutes ‘rent’ and is liable for withholding of tax under Section 194-I of the Act.  The taxpayer, being aggrieved by an order of the CIT, filed a writ petition before the High Court. High Court’s ruling  The Supreme Court in the case of Rajbir Kaur v. S. Chokesiri 2 has observed that it is the ‘operative intention of the parties’ which has to be ascertained, rather than viewing the matter from the standpoint of whether possession is exclusive.  In the case of Krishna Oberoi 3 the High Court has held that the consideration received by the hotel management towards room charges envisage payment of rent under Section 194-I of the Act.  In the context of applicability of Section 194-I, the Delhi High Court in the case of United Airlines 4 held that the landing of aircraft or parking of aircraft amounts to user of the land of the airport. Hence, the landing fee and parking fee will amount to ‘rent’ within the meaning of Section 194-I, even if it could not have such a meaning in common parlance.  The Supreme Court in the case of Sultan Brothers (P) Ltd 5 has held that a composite letting out or hiring of building, machinery, etc. would be treated as ‘inseparable’ and falls under the residuary head of income. The income realised by way of rental income from the building, whether a commercial building or residential house, is assessable under the head ‘income from house property’. However, where the letting of the building is inseparable from the letting of the machinery or plant and furniture, the rental received for the building is to be assessed under the head of ‘income from other sources’.  There cannot be any generic observation on whether a particular transaction amounts to leasing, or letting out or hiring premises or other properties. Courts’ endeavor should in all cases be to ascertain the parties’, ‘operative intention’ and the mandate of the law, which defines what is rent or amounts to letting out, etc. ________________ 2 Rajbir Kaur v. S. Chokesiri and Co. [AIR (1988) SC 1845] 3 Krishna Oberoi v. UOI [2002] 257 ITR 105 (AP) 4 United Airlines v. CIT [2006] 287 ITR 281 (Del) 5 Sultan Brothers (P) Ltd. v. CIT [1964] 51 ITR 353  Explanation to Section 194-I of the Act enlarge the scope of traditional concept of letting or renting, by using the expression ‘other arrangement’ aimed at permitting ‘use’ of either immovable property (land and buildings) or other properties (plant, equipment, machinery, etc.). The definition of ‘renting’ has to be viewed in this perspective and it is clear as to the nature of transactions it covers. It is expansive in sweep 6 i.e. it covers any land, building, machinery or plant, irrespective of ownership of the payee. The Parliamentary intent was clear, to those transactions.  The intention of the parties in the present case was to use the technical and specialised equipment maintained by taxpayer. Further, there was no escape from the fact that the infrastructure was given access to, and in that sense, it was given for the ‘use’ of the mobile operators.  The towers are the neutral platform without which mobile operators cannot operate. Each mobile operator used to carry out this activity, by renting premises and installing the same equipment. The rent paid by them to the owner, were business expenses. However, in the present case, instead of the mobile operator performing the task, it was done exclusively by the taxpayer.  Relying on the decision of the Supreme Court in the case of Rajbir Kaur, the High Court observed that the dominant intention in these transactions is the use of the equipment or plant or machinery. The use of the premises was incidental as there was inseparability to the transaction, as spelt out in the case of Sultan Brothers.  The taxpayer’s contention, that the transaction is not ‘renting’ at all, is incorrect and the tax department’s contention that the transaction is one where the parties intended the renting of land is also incorrect.  The underlying object of the arrangement or agreement was the use of the machinery, plant or equipment, i.e. the passive infrastructure. It was necessary to house these equipment in some premises is entirely incidental.  In view of the above conclusions, it has been held that the writ petition is allowed to the extent that the tax deductions to be made by taxpayer are to be at the rate directed in Section 194-I(a), for the use of any machinery or plant or equipment, at the rate indicated for that provision, i.e. two per cent. __________________ 6 Any other…arrangement for the use, (either separately or together)
  • 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. Our comments If the telecom service provider hires the premises/land on rent and installs its own infrastructure, then the rent paid for the use of such land is liable to withholding of tax at the rate of 10 per cent. However, in the present case, the taxpayer has maintained technical and specialised equipment (telecom towers and network infrastructure) and rented the same to the telecom service provider. Alongwith such equipment, the premises/land was also rented since the use of the premises was incidental as there was inseparability to the transaction. The High Court held that that the intention of the parties is more relevant in order classify a particular payment for its taxability under relevant provision. In the present case, the intention of the parties was not to use the premises but was to use the technical and specialised equipment maintained by the taxpayer. Accordingly, the High Court held that the payment is liable to withholding of tax at the rate of two percent.
  • 4. © 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 Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, 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